Public loses $37 billion to private landowners every year

Sang Architects, Auckland multi residential Remuera101We can work out that the public is losing at least $37 billion a year to private landowners. This should more than replace income tax.

There are 1,771,200 private dwellings in New Zealand (Stats NZ) The mean house price rose from $395,530 in April 2014 to $466,665 in 1 July 2011 (Quotable Values)

That is in just under three years the mean house price rose $71,135. Almost all of this was privately captured as capital gain.

So let’s multiply these two figures to get the total of privately captured capital gains on those private residences and we get $126 billion.

This is for a period of just under three years, two months short of three years. So yearly the amount of capital gain is now one third of 34/36 of $126b, or one third of $119 billion = $40 billion. A very tiny fraction of it will have been captured by local authorities in rates. Almost none will have been captured by central government.

The rates revenue of all local authorities in 2013 was $4.5 billion. Suppose two thirds of this was land value (a high figure – more like the Auckland ratio), then local authorities revenue due to taxing of land value would be $3 billion. But if the ratio is lower, then it would be as low as $2billion a year.

So $40 billion figure gets reduced by somewhere between $2 and $3 billion and we have lost in public revenue at least $37 billion a year through failing to capture capital gains, or failing to impose full land rentals, which is essentially the same.

To put this in perspective, the GDP of the country is $227billion in the year to March 2014.

The revenue from income tax is $29.8 billion and the total revenue from taxes $72.5 b. Expenses were $73.1 billion in the last budget.

So $37 billion is being pocketed by private property owners every year when the value has been created by the wider public. This money rightfully belongs to the public. (Compare this: Labour's Capital Gains Tax would yield only $1b a year "in time" and the Greens Capital Gains Tax would yield $4.5 b/ year "in time")

On the other hand, the government has confiscated $30b of our earnings through income tax and taken nearly $18 billion from our expenditure in GST, making everything less affordable. No wonder there is poverty in New Zealand. No wonder there is inequality.

dairy-farm-for-saleBut revenue from land rental would not be the government’s only income. We should be charging rent for the monopoly use of all natural resources, not just land. The principle that we should pay for what we hold or take but not for what we do or make means that we should pay taxes on our monopoly use of the rest of the commons. What is the commons? Everything that occurs naturally or is part of the social or cultural capital – water, fish, forests, electromagnetic spectrum, minerals, oil, gas, as well as the monopoly use of the infrastructure. The latter includes taxes on use of airports, hydroelectric power stations, ports, and so on. It also includes use of the commons for emission of pollutions. The biosphere is used for emissions of greenhouse gases and the rivers, lakes, and seas cleanse the pollutants from farms. We already tax tobacco, alcohol and gambling and would continue to do this.

address_withheld_negotiation_100189170163421799Lifting the tax burden from the productive sector by taking off income taxes, GST, corporate tax and interest revenue taxes would allow productivity but, given the burden of resource taxes, the pattern of productivity would be very different. It would look more like a post fossil fuel economy.

Would the revenue be sufficient to run a country? We currently spend $73.1 billion. (Budget 2014-5). So we would need a further $36 billion. Karl Fitzgerald in his Australian study worked out the other resource tax revenue and managed to match the current revenue. There is no doubt we could too.

From interest to reciprocity, savings pools are a great innovation.

Among all our discussion of currency and tax changes at national level we must never lose sight of the good things happening at local level. For it is at the level of neighbourhood that we all exist. It is at community level where our comfort comes from.

And that is where we can take action to restore local economic resilience and maximise our chances of survival after a major bank failure and economic crisis. Nicole Foss has reminded us yet again that the system must crash. “When the music stops there is only one chair for every 100 dancers”.

Money-tabooRecently I have had the privilege of attending the annual hui of the Living Economies Educational Trust. Among the local resilience initiatives being taken are green dollars, timebanks and now savings pools. It is the savings pools that I want to talk about here.

A savings pool is a family sized group of people (4 to 30 people) who get together regularly for the mutual financial purposes. It is a cross between a purchasing cooperative, a support group and a pawn shop. There is not a scrap of interest paid to anyone.

So how does it work? Members meet at someone’s home monthly. They discuss what they will contribute to the group’s shared pool. It might range from $10 to $200 a month, but where the membership is say 10, the group’s monthly savings can quickly range from $100 upwards. Before long you have a sum of say $3000.

But you don’t want this money languishing in the bank. You want it out amongst your members doing good. The members volunteer in turn what their financial needs are. Perhaps three in the group have financial needs. Susan draws attention to her credit card debt, Jim is desperate for a new car so he can get to work and a Rosy needs to pay a dental bill. The group then pays attention to those three needs. They figure they can work out how someone can take Jim to work for a while and decide to pay off Susan’s credit card. Then Susan can put more into the pool each month.

Susan’s promise is to pay $50 a month to pay the pool back, plus another $50 as reciprocation (equal give and take) towards her future pool account. She pays a total of $100 a month now.

In savings pools trust is important but there is a saying "Trust in God but tie up your camel". Tying up your camel entails prudent purchasing agreements. Collateral is usually necessary. e.g. if I want $1000 from the group to pay off my credit card debt and I have a $5000 car, the group can own my car and I enter into a purchasing agreement with the pool to buy back my car for $1000. That way the pool is more like a special kind of pawn shop. The car should be insured. The whole roup reviews their next month’s contribution, and the result is a bigger fund. Since they don’t know Rosy well they meet in her house next time. As trust builds and the social capital of the group grows, they realise Rosy should be next in line for a contribution from the pool as her teeth really are causing her trouble. Maybe there is enough in the pool to meet her needs now.

Rosy offers some appropriate property for sale and purchase, plus an equivalent savings/contribution to the pool. Money, Colorful words hang on rope by wooden peg The accounting spreadsheet is available for them all to see. They add up what they will have at each month in the future, aware of some of the future demands on the use of the funds.

When Jim’s turn comes around for a car the pool has $5000 with which to buy a car. The car belongs to the pool. Jim uses it and pays off $100 a month. But as before he also has to put in another $100 a month so that others can have access to his money during the period he pays it off. If $100 a month is all he can afford then the term could be extended for two years. That is reciprocity in action. So instead of paying it off in one year Jim takes two years. At the end of the two years ownership transfers to Jim. He has paid off $5000 plus he has put another $5000 in the pool. He can now withdraw that $5000. Meanwhile it has been at work for the pool’s benefit.

So you see not only has the group lent without interest but nobody gains from being a borrower without paying an equal amount back to the pool. Reciprocity replaces interest.

There are now 22 savings pools in New Zealand and membership is growing fast. Several people are now available to help new groups form. They do this by running a game (it's more fun than monopoly) where they are each given an identity (e.g. a retired couple with no mortgage or a solo mother with part time work) Each person is then handed a crisis/opportunity card saying what happened that month for them (unexpected expense they can’t meet or an inheritance or ‘no change’). Then they role play what might happen within the group. At the end of the game people are itching to start their own savings pools.

These groups work particularly well if they start with a group who already know each other. It is also good if you have a cross section – those with extra money they want to protect in case of an economic crisis and those whose finances are more precarious. If a person dies or moves away their money can be withdrawn, together with their savings points (amount of money multiplied by the number of months they have had it in there) and passed to their heirs.

You need a person who will be a good recorder.

I have been to several of these events. Enthusiastic members of existing pools tell us of the celebration and joy when a credit card is paid off. One group had a party where they ceremoniously cut up the card.

The first financial threat is a global downturn causing major economic contraction and loss of ability to service mortgages. The second is bank insolvency where depositors (unsecured creditors of the bank) find their accounts have been frozen overnight and wake up with a "haircut". In crises the solvency of banks depends on the elimination of debt and calling in non performing loans (mortgage foreclosures and asset seizures).

Savings pools already own all assets not yet paid for. Contributions will tend to dry but but the pool community remains. Loss of liquidity results in temporary paralysis of the system, but no loss of its real underpinnings

If you would like to find out how it all started have a look at the 15 min video done by its founder Bryan Innes here.

For more information go to the Living Economies website where you can read more and see a typical agreement.

To start one in your area contact either Peter Luiten, Bryan Innes, Phil Stevens or Helen Dew. Or leave your information here

High time the universities changed their teaching on money creation

It’s disturbing when university professors tell lies about the money creation process. I thought universities were supposed to be repositories of knowledge and their statutory duty was to pass on knowledge. And when they fail in that duty and pass on myths to their students who then go on to hold jobs in banking, media and all the related jobs, how much greater the crime? And when journalists pick up untruths from the academics and their graduates, how can a society learn the truth?

Some years ago I was contemplating spending my remaining years suing a university for inaccurate teaching about money creation. I was enraged that a trusted societal institution should fail so profoundly in its statutory duties when the consequences were so enormous and profound. But I chose instead to co-found the New Economics Party and I don’t regret it.

Every now and then Professor Steve Keen from Sydney has a sparring match with Paul Krugman, the former Nobel Prize winner in economics and columnist for the New York Times. The publishing of a paper by three Bank of England economists – Michael McLeay, Amar Radia and Ryland Thomas – dispelling myths about money creation would have set it off again. They were so keen, they even did a youtube video filmed in the gold vaults of the bank. Writing on his debtdeflation blogspot, Keen said he eagerly awaited Krugman’s reaction to Threadneedle Street’s paper. He is not expecting university lecturers to change their lectures any time soon.

As for me I am a bit embarrassed that the first chapters of my book Healthy Money Healthy Planet – Developing Sustainability through New Money Systems pbl Craig Potton 2005 refer to “fractional reserve banking” and the “money multiplier effect” which, according to both the Bank of England and to Michael Kumhof and Jaromir Benes of the IMF are just plain wrong. I wish I could change it.

So how is money created? Well I actually wrote both versions of money creation in my book and the second one is right. I must have confused many readers and apologise.

The Bank of England paper dispels two myths. It says:

“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks:

• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.”

They say “This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.”

It’s a lovely clear paper, accessible and readable. The two videos with it are filmed against the unforgettable and authoritative background of gold nuggets in the vaults in the Bank of England, a clear statement in itself. It describes how some money is created by buying assets, outlines the constraints on bank lending and reminds us the way money is destroyed is by paying back loans. It says clearly “Banks do not act simply as intermediaries, lending out deposits that savers place with them”.

Knowing that commercial banks create most of the broad money supply and that savings takes money out of the total in circulation, I have always been suspicious of comments of bank economists, journalists and politicians who urge more savings. So here is a quote on saving that I like. “When households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend.” I like it. It makes sense.

So are universities the right place to start? I am not sure. It is logical enough to argue they train society’s professional economists and influence journalists and politicians. But it may also be useful to focus on educating journalists to be suspicious of academics in economics. After all do other disciplines have websites and books similar to “Unlearning Economics” and “Sack the Economists” and jokes about not letting facts get in the way of a good theory?

This blog is not about solutions. It is about getting the facts about banking and money creation right in the first place. When solving problems you have to start with facts not myths. And whether you are a Social Creditor, Positive Money adherent, New Economics Party member or anything else you will have your solutions to public money creation. This is not the forum to debate solutions.

Well so what should we all do? Any of these would be a start.

1. Send the paper’s link to top politicians through whatever media you fancy, be it twitter, facebook, email or snailmail.

2. Get active in any organisation or group that tells it like it is.

3. Have a look at a student’s economic textbook and write to the university who prescribed it pointing out the authoritative paper and urging they teach facts not myths.

4. Ring up any radio station that perpetuates the myth of intermediation pointing out it is wrong.

5. Join with others in this campaign.

6. Offer to help the New Economics Party

7. If you are a student, then organise petitions to your academic staff and changing the textbooks.