Capital Values, Wealth, and Related Topics
In this chapter, I want to discuss implications of the conservation laws associated with the pool of fluid capital as they relate to asset values in an economy. Specific topics to be discussed include aggregate wealth, real-balance (or wealth) effects, the burden of government debt, taxation of capital gains, gold standards, monetization and demonetization of economies, and economic growth and deflation.
KeywordsCapital Gain Domestic Currency Upward Pressure Real Stock Gold Price
Unable to display preview. Download preview PDF.
- 1.The October 1987 stock market crash provides a striking manifestation of this fallacy of composition in operation.Google Scholar
- 2.This will be recognized as the Hicksian definition of income [Hicks (1946, p.173)]. It also represents one of the conventional definitions of permanent income [See Friedman ( 1957, Chapter 3)]. Even with the Permanent Income Hypothesis, one nevertheless has to be wary of a fallacy of composition. For an individual, permanent income is defined by Friedman as rW, where r is an interest rate and W represents the individual’s stock of capital, including human capital. Clearly, one cannot define aggregate permanent income as rW“, where W’ = EW, because of the fallacy of composition mentioned in the text. To describe permanent income in the aggregate as rW’ entails nothing other than defining aggregate wealth as the capitalized value of permanent income, where permanent income is defined to begin with as the capacity to consume today without impairing the capacity to consume tomorrow. To treat aggregate wealth as something apart from aggregate income is simply to play a word game with no substance.Google Scholar
- 16.A market in which asset price inflation was spurred, at least in part, by monetization of the assets involved fine art in the late 1980s. The purchase of van Gogh’s Sunflowers by the Australian Alan Bond for $53m, for which $27m was borrowed from Sothebys, is a prime example. Although the loan to Bond from Sothebys did not involve the direct creation of money, it probably did indirectly because Sothebys almost certainly had borrowed the money from a bank.Google Scholar
- 17.Coins represent still another example. The rare (and not-so-rare) coin market is sufficiently thin that a few million dollars can cause prices to shoot upward. Several rare coin funds involving upwards of $ 100m of Wall Street’ money were set up in the second half of the 1980s and clearly had a major impact on coin prices. Although these funds were not themselves bank financed, a number of banks started making loans to finance ‘investment’ in rare coins. At least one of these, the West Coast Bank of Encino, CA went under, resulting in the acquisition by the FDIC of portfolios of coins that had provided collateral for loans that had gone sour when the bubble in the rare coin market burst in 1990 and 1991.Google Scholar
- 19.The ‘Treasury View’ was the response of the British Treasury to the views, proposed by Keynes and Hubert Henderson in Can Lloyd George Do It?, to combat unemployment through debt-financed public works. An excellent account of the debate is given by Clarke (1988).Google Scholar
- 20.Statements that borrowing from abroad has financed a U.S. consumption ‘binge’ during the 1980s and much of the 1990s would thus appear to have some validity. The deficit in the balance of payments during these years would appear to be a direct consequence of the Federal Government’s decision to fund current operations and transfer payments through borrowing. These decisions have stimulated consumption (at the expense of investment), and upward pressures on the domestic price level have been alleviated by a virtually infinitely elastic supply of imported consumption goods at current prices. This was possible, even with the deterioration in exchange rates vis-a-vis the dollar, because of strong productivity gains abroad.Google Scholar
- 30.Obviously, creation of a financial system is only one of the tasks. Markets and meaningful relative (and absolute) prices must be created, and participants must acquire experience in their use. [For a discussion, see McKinnon(199I)]. This has especially been the case in Russia, where a meaningful market economy last operated in 1917.Google Scholar
- 31.For a detailed analysis of the points in this paragraph, see McKinnon (1991).Google Scholar
- 32.The absence of a viable fiducial structure has been especially apparent in Russia in the 1990s. Among other things, the economy lacks a banking system that allows for the funding of current production by the creation of money through self-liquidating short-term loans. As a consequence, much of the economy is barter driven. For a discussion and analysis, see [Woodruff (1999)1.Google Scholar
- 33.An obvious question at this point is whether the U.S. was in fact exporting gold during the period 1873–1896.Google Scholar