Rising Tide at Sunset

The Credit Crunch

- the Cause and the Cure - 3

by Bob Keall

3 - Inflation

Inflation used to be (and often still is) patently due to using Budget Deficits and Reserve Bank credit to finance social welfare, wars and other political purposes. That initial genesis is of course compounded by the unearned factor.

However, with recent (2001-2009) balanced or even surplus Budgets, we have still had rampant inflation. The inflation which persists is then disguised under a CPI (Consumers' Price Index) which accommodates land price increases at the expense of wages and prices. We work harder for less to accommodate higher land prices under a tolerable net CPI. [New Zealand Herald 16.7.97] Recent property prices have blown that one.

Commodities, goods and services, derive their exchange value from the labour applied or avoided. Their supply varies according to demand. Wages are prices, and prices are wages. Land is not man-made, has no labour content, has an inelastic supply (ie is in fixed quantity) and has an unearned value, derived from artificial right or privilege—a fragmentation of baronial fiefdoms. Likewise, tradeable ownership rights to other natural resources or natural monopolies give purchasing power but produce nothing. Corporatised power board shares issued free to consumers went from $3 to $13 but produced no more power. "Corporatisation had already released over a billion dollars of shares into the community" [New Zealand Herald 13.9.95].

Underlying currency inflation is caused by rising land values. We now have a land-value based currency. This is acknowledged in Reserve Bank references to the "underlying inflation of the non-producing sector"—a term covering land and other factors beyond the Reserve Bank's control.

The Govt. and the Reserve Bank recognise the "correlation between house prices and inflation" [New Zealand Herald 17.3.07]. The correlation is causal, and if anything Monetary Policy promotes it!

They recognise that "Monetary Policy" cannot control currency inflation. They rely on some global calamity to justify their past persistence with an inappropriate, ineffective, counter-productive manipulation of interest rates.

The focus on wages/prices is misleading and disingenuous. Wages are prices and prices are wages. Both reflect currency inflation. They do not cause it. That they rise more slowly than land values means only that people work harder for less.

Raising interest rates increases the attraction of Negative Gearing (now called Positive Gearing!) by increasing the income tax set-off. This attraction pushes up land prices—funded by Government! It also increases the availability of off-shore mortgage money through the Banking system.

Lowering interest rates will sustain prices. Belated lending constraints will slow the process, and restore traditional Trustee Security "repectability" to it. Both will entrench "the system", but won't fix the problem now exposed.

Likewise references to "house prices" and "property" are misleading and culpable deceptions. Conflating land and improvements as "property" or "house price" confuses the two distinct elements¹. The improvements are the product of private labour and capital, and depreciate from day one. The land value has no cost of production. It is a differential value enhanced by public expenditure on infrastructure and must be recovered accordingly, not privatised². The inflationary factor is the land value not the improvements!

Any annual rental payment simply diverts from payer to payee a portion of current production. When the payment is for privatised natural resources the payment causes the mal-distribution of wealth in society derived from unearned gains. When the prospect of that unearned gain in future is capitalised for sale now it not only increases the wealth disparity, it also imposes an excessive demand on current production - future money but only present production; too much money chasing too few goods—currency inflation! Speculative trading in those Tradeable Rights further increases the supply of money, again with no commensurate production. A large proportion of the proceeds goes back into the system.

Capitalised annual economic rent (land price) is the underlying cause of currency inflation when monetised through the Banking system. Money is a measure of value for the labour content of goods and services, for the purpose of exchange now, progressively or later. Introducing the capitalised future value of a gratuitous licence that has no labour content into that exchange process expands that measure, but with no corresponding increase in goods and services. Too much money chasing too few goods—currency inflation.

Over time the value of the labour products diminishes, whereas the licence value appreciates, compounding the effect. The inflated/devalued currency is most rapidly reflected in higher land prices which further inflates/devalues the currency, creating a pernicious speculative spiral on which some live high through farming economic rent and inflation, whilst the majority strive to survive on the treadmill. Easy money accelerates the process. Collecting the economic rent annually (L.V. Rates or Land Value Tax) or by a Development Levy, eliminates the business cycle of boom and bust. viz: that point at which labour can longer gain employment.

Tradeable Ownership Rights to Natural Resources not only cause an unjust wealth disparity but also debauch the currency. (The acronym TORTNARES has a legal connotation which might well inspire a challenge).

When access to natural resources is determined by a full market rental, lease, licence or fee in favour of the community, trading in natural resources is eliminated. Society gains its true source of revenue in lieu of taxes on production and savings, Labour finds employment and the inflationary factor disappears.

"Imported" inflation is absorbed over time in the exchange rate which is just another part of the price mechanism upset by currency inflation. Likewise, price inflation, which is the inevitable consequence of currency inflation, must be distinguished from a price rise which is only the price mechanism regulating supply and demand. The CPI doesn't do this!

Land price deflation can be caused by trade or currency crises, quite independently of Budgets, interest rates or Banking practice changes e.g. switching OPEC oil settlements from US dollars to Euros will weaken the US dollar and have a deflationary effect despite a return to Budget Deficits i.e. currency expansion or contraction is heavily influenced by land price rise or fall—the rogue factor.

Continued: ...
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1 "The Corruption of Economics" by Dr Mason Gaffney, Prof. Of Economics, University of California, examines the intended confusion of "land" as capital over the last 100 years or so. Pdf available as: "The Neo-Classical Stratagem against Henry George."

2. Land price only arises because the community fails to collect the annual economic rent properly due to it. It then becomes capitalised as selling price. Thus any annual charge, such as Rates or a Land Value Tax, reduces the price by the amount of charge capitalised at the current rate of interest. On this basis the boom/bust business cycle is eliminated and we all share progressively in "Growth in the Economy", not just those who own it.