Property Money

Introduction

Property Money is backed by the economy's total wealth:

When the economy's total wealth increases, so does its supply of property money. 

When wealth decreases, property money supply decreases.

Contrast this with gold-backed money:  A customer deposits gold and the bank gives him a gold certificate.  The gold certificate circulates as money.  The money supply increases.  When anyone demands gold in exchange for the certificate, the bank gives them the gold and the certificate goes out of circulation.  The money supply decreases.

We'll refer to "demurrage" as the bank's cost of securing its gold from thieves, etc. 

Demurrage

Remember that concept.

Let's now look at government as a "bank" that "stores" the economy's wealth.  That store of wealth is the total value of property rights protected from thieves, etc. under law.     As exemplar, we'll look at the most basic property:

A family dwelling.

Building a new house "stores" it under government protection.  The government issues a certificate known as a property title.   However, unlike a gold certificate, the title isn't "liquid" enough to circulate.  This is where property money comes to the rescue.

Building a new house with a liquidation value of, say, $200,000, increases the property money supply by $200,000 minus the sunk cost, say $150,000, of building it.  Sunk cost includes, among other things, wealth consumed by the house: boards, nails, concrete, wires, etc.  So in our simple example, $50,000 of wealth has been added to the economy.  The property money supply thereby increases by $50,000.

Thus every dollar of property money in circulation is backed by a dollar of value in the economy's wealth.

This essay describes how property money satisfies the demand for liquidity while privatizing the delivery of social goods.

But What About Conventional Monetary and Fiscal Policy?

The conventional wisdom hears "property money satisfies the demand for liquidity" and raises its two big bushy eyebrows:

Monetary and Fiscal.

Monetary

Conventional measures of "money supply" are a tiny fraction of the economy's total wealth, so property money seems to inflate the money supply beyond the demand for liquidity.

Fiscal

By focusing on liquidation value, so-called "mark-to-market accounting" applies across the economy.  In the conventional narrative, mark-to-market accounting caused the liquidity crisis of 2007.

Here's the conventional narrative of that crisis:

The liquid value of mortgage-backed securities collapsed.  Major financial institutions were heavily invested in them.  Regulators, following mark-to-market accounting, declared them insolvent.  The cascade of failures caused government authorities to step in and "inject liquidity".  They did.  Crisis over.

That's the conventional wisdom's narrative.

The conventional wisdom doesn't much like discussing the fact that the resulting economic downturn foreclosed mortgages, kicking millions of families out of their homes and giving ownership of them to the financial institutions.  Millions of houses went on the market.  Some influential economists had the temerity to suggest the government tear down family dwellings so as to raise housing prices.  The powerful institutions that demanded liquidity from the government wanted help in making their loan payments.  They didn't want to be "foreclosed".  The government helped them rather than the families those institutions foreclosed.  Government continues to "inject liquidity" to these institutions.  Nowadays they call it "repo market loans".

So... Here's What

The less conventional mind will perceive a curious opposition between the conventional wisdom's 2 raised bushy eyebrows:

Property monetary policy over-supplies the demand for liquidity and property money fiscal policy under-supplies the demand for liquidity.

In fact, property money balances this polarity to satisfy the demand for liquidity.

We'll now dive into that.

A Property's Demand For Liquidity Derived From Its "rNPV"

Economists call the relationship between a property's liquid value and the associated demand for liquidity the "risk-adjusted net present value" of the property or "rNPV".  That's a mouthful but it's a simple concept:

A property's liquid value is the size of a low-risk loan that could be paid off by the property's profit stream.  That liquid value is the property's rNPV.

To illustrate, let's return to our exemplar of the family dwelling.  What is the profit stream of a home?  Economists view houses as does a landlord:

1. Estimate the incoming cash flow from rental payments by tenants, say $1000/month.
2. Adjust this downward (discounts) to take into account risks of, say, tenants not paying their rent, etc., say $900/month.
3. Estimate the business costs of managing the rental property as outgoing cash flow, say $200/month.
4. Risk-adjust outgoing cash flow (maintenance, utilities, etc), upward (reverse discount),  to be conservative, say to $250/month.
5. The difference between incoming and outgoing cash flow is the low-risk expected profit stream from the property, $900-$250 = $650/month.
6. He then asks:  "If I treat the low-risk profit stream as mortgage payments on the property, how much could I borrow at a low-risk interest rate?", say, a 3%, 30 year mortgage would be $154,173.

The size of this loan is called the risk adjusted net present value or rNPV of  the property.  If the investor can buy or build that house for less than $154,173, then it is a profitable investment.  This is true whether he invests his own money or borrows from a mortgage lending institution.

The lending institution's demand for liquidity, associated with that mortgage, is the lending institution's demand for mortgage payments.

The rNPV calculation applies to all investments, hence all property rights in the economy -- not just housing.  It even applies to the liquid value of mortgage lending institutions like the government-sponsored enterprise "Fannie Mae" -- institutions that were endangered circa 2007 due to the liquidity crisis.

How Property Money Establishes the Supply of Liquidity

Imagine every asset were a bank that holds property money reserves for its depositors.  They may deposit or withdraw property money on demand.  All assets, taken together, are an enormous banking system with huge reserves -- one big reservoir of liquidity. 

What keeps property money soundly distributed across these "banks"?

Continuing with the house as exemplar, under the property money regime:

1. The government issues the landlord title to the house.
2. The government asks for bids on the title.
3. Investors place bids in escrow -- property money deposits at 100% of the bid.
4. The high bid in escrow establishes the liquidation value of the house. i.e. The landlord can, at any time, liquidate the house by accepting the high bid in escrow thereby transferring title to the bidder.
5. The government charges demurrage (remember that term?) to the landlord in proportion to its liquidation value.
6. The government also charges demurrage to all bids that are not the high bid in escrow.
7. The government also charges demurrage to all money not in escrowed bids.

The government -- like the bank that holds gold in safe keeping -- protects property rights.  The cost thereof is covered by demurrage in proportion to the liquidation value.  This is reminiscent of a property tax, but is more accurately described as a use fee for the government service of protecting property rights.

Applying demurrage to all property money, except when part of a high bid in escrow, means that transactions will shift property money between high bids in escrow.  Payment processing institutions will be paying demurrage while executing such a shift. 

This is the incentive to keep all property money as an up-to-date estimate of the liquidation value of the economy.

This is what keeps property money, hence liquidity, soundly distributed across the "banks".

How Property Money Meets the Demand for Liquidity

Recall to the statement:

The lending institution's demand for liquidity, associated with that mortgage, is the lending institution's demand for mortgage payments.

First we have to clear out some confusion about "demand" in the vernacular vs "demand" in the economics argot.  In the vernacular, when I "demand" something, it implies an "or else" enforcement of my "demand".  In "The Law of Supply and Demand", on the other hand, "demand" is merely my willingness and ability to pay some amount of money in exchange for some product or service at that price.  There is no notion of "force".  

So, which of these senses of "demand" applies in the phrase "demand for liquidity"?

Is it my willingness and ability to:

• take something by force?
• pay for something I wish to take?

The phrase "demand for liquidity" has the form of someone being willing and able to pay some amount of money to obtain some amount of  "liquidity".  However, this is nonsense.  Money is liquidity so it is as though one is saying "I'm willing to pay you $1 of liquidity for $1 of liquidity."

No, what the lending institution is doing when its "demand for liquidity" is a "demand for mortgage payments" is threatening to use force to extract that payment.  

For instance, Shays's Rebellion resulted when lenders demanded payment on debts held by Revolutionary War veterans who, themselves, had not yet been paid for their service in the armed force .  Being unable to pay in the form of money demanded, the lenders sent the sheriffs out to, by force take the farms of the veterans.  This not only deprived veterans of their ability to provide for their children, it deprived them of the vote since one had to own property to vote!

Since it was such men as Shays who had, by force, provided lenders access to the civil infrastructure, hence the very legal recourse they relied upon in calling in their debts by force, the structural absurdity is grotesquely apparent.  The response was to call forth greater force with which to quash Shays's Rebellion.  The richest man in America was George Washington, the military leader responsible to the military veterans.  Washington, his aide-de-camp Alexander Hamilton and others saw the need for a Federal government capable of paying its military veterans in money acceptable to lenders and quashing all rebellions such as Shays's.  The result was the US Constitution.

So, let's clear up this confusion about "demand" once and for all:

Without those who place their flesh, blood and bone between chaos and civilization, no one is in any position to "demand" anything but them.  All "demand" originates with them.  Any pretense otherwise, such as pretending "sovereignty" resides with those able to raise the largest number of such men, is an arrogation of power that is ultimately as doomed as is a merchant wielding a piece of paper in a duel with a swordsman.   

With that in mind, let's talk about what such men "demand" of civilization as the only sound basis for talking about the demand for liquidity.

The government monitors the cost of replacement reproduction (CORR).  Nowadays, CORR is dominated by the amount of money a woman can make by exchanging her most fertile years for gainful employment with the help of birth control and abortion.   The more valuable her characteristics to the economy, the higher the CORR associated with her socioeconomic cohort.  To sustain intergenerational value, CORR must account for the fact that the economy has a structural bias toward removing from the next generation the characteristics it values in this generation.

Any lesser definition of "cost of living" is a de facto act of genocide by the government against its own people. 

We are now at the crucial issue of the delivery of social goods, so viciously inverted during the so-called "bail-out" of financial institutions by the government.  Families, deprived of jobs during the downturn, were unable to make mortgage payments.  Many were driven to bankruptcy and eviction from their homesteads -- homesteads that those institutions confiscated with government's help.  Many of these held prime mortgages, but were lumped in with irresponsible subprime homeowners by the vicious narrative of conventional wisdom.

In a well-functioning property money regime:

A monthly dividend is unconditionally and equally sent to those citizens who are responsible for placing their flesh, blood and bone between chaos and civilization.

Such citizens are "sovereigns" as they embody the force inherent in any society.

Sovereigns are responsible for the support of all social goods delivered to the society, starting with their own replacement reproduction.

Sovereigns possess the liquidity not only to meet their own mortgage payments, but to "bail-out" their fellow citizens via their donations to the civic culture that once was the backbone of charity in the United States of America:

Fraternal organizations and churches.

In a liquidity crisis sovereigns will indirectly "bail-out" financial institutions according to the degree to which those institutions match the values of the civic culture of community charities.

The supply of liquidity adjusts to keep CORR (cost of replacement reproduction) constant as follows;

When the CORR increases, the government increases the demurrage charges, thus taking property money out of circulation via property owners.

When CORR decreases, the government decreases demurrage, thus putting money into circulation via the sovereigns.

What About Financial Weapons of Mass Destruction Called "Derivatives" ?

Before the "liquidity crisis", Warren Buffett said "... derivatives are financial weapons of mass destruction..."  Then they exploded, devastating families.

The substance of Buffett's comment boils down to the fact that mark-to-market accounting is not structural as it is would be with property money.

Derivatives "bundle" other assets together.  Sometimes, the way they are bundled is too opaque for proper estimation of their liquid value.  This is particularly true when debt (or other liability) is bundled together with wealth to form derivative property rights.

Returning to our simple exemplar of home ownership, let's create a "derivative" that "bundles" title to the home together with liability for a home equity loan.  In other words, there are two "titles" bundled together:

1. a positive value to the owner of the home title.
2. a negative value to the owner of the liability for the home equity loan.

The new "property" has a liquid value that is derived by subtracting the liquid value, to the lender, of the home equity loan, from the liquid value of the home.

Under the current system, if someone wants to purchase this derivative, they must apply their own mark-to-market accounting to both underlying assets to estimate its liquid value.   Now, imagine a deregulated banking industry that can bundle huge numbers of houses and home equity loans into a single "property" derived from them.  These are called "mortgage-backed derivatives".  Being deregulated, banks play fast and loose with mark-to-market accounting estimates of their real liquid value.

And this is just the start...

Mortgage insurance properties derive from mortgage-backed derivatives.  Insurance of mortgage insurance (mortgage reinsurance) derives from mortgage insurance.

High atop this pyramid of derived property rights, it becomes virtually impossible to see all the way down to the bottom to the underlying, wealth in the economy so as to come up with an accurate liquid value.

Property money solves this by declaring any property that is protected by law to have a liquid value determined by its high bid in escrow.

Monopolies

Finally a word about how property money deals with private monopolies, since they are increasingly privatizing tyranny:  censorship if not punishment of individuals not compliant with orthodoxy.

Property money, by using the liquid value of title to a business, in assessing its demurrage, burdens monopolies with financial support of social goods via sovereigns.  This is because as the monopoly profits become apparent to all, the high bid in escrow (hence liquid value) goes up.  If any mindless investor could make the same level of profit as the current owners of the business, the high bid in escrow increases to the point that those profits are siphoned off into demurrage.

Bringing this down to earth:

The demand for the most primitive property, land that provides food and materials to house and clothe a family -- enabling Replacement Reproduction -- increases with the size of the economy.  The more ways in which land can be put to use by a civilization's economy, the more demand will exist for it.  "They aren't making anymore of it," as the land speculator, correctly, believes.

This is the most primitive example of civilization's so-called "network effect" giving rise to monopoly rents.   The connections between businesses in the economy form a network.  The number of potential connections goes up as the square of the number of businesses:  1000 businesses?  1 million potential connections.  Each connection adds to the aggregate demand for vital assets like land.

The phrase "land speculator" has a bad connotation for a good reason:  By purchasing a piece of land, he is enjoying the protection of that property right even though its value is increasing due to others' investments in growing the civilization's economy.  He can sit on vacant land and do nothing with it but reap the increase in its liquid value as civilization grows.  If he puts that wealth to influencing government, he can even shift taxes off of land and onto the income of young couples trying to have children.  They may be unable to afford to responsibly raise a family due to the cost of land.  If that young couple represents the kind of responsible people required to protect property rights, there comes a point when they will cease respecting land owners.  At that point the top heavy civilization crushes its weakened foundation.  

Civilization collapses.

I used land as an exemplar but there are many such "network effects" at work in civilization and it is from these that civilization's power derives.  Today's Internet giants all rely heavily on capturing the value of network effects, just as did the original telephone network monopolies:

Every new customer adds to the value of the network in approximate proportion to the number of other customers because that is the number of potentially valuable connections.  If a private entity owns a network of customers, as do, for example, Facebook, Twitter, Youtube, Paypal, Ebay, etc., the larger their customer base, the more unrealistic it is for any competitors to discipline them.  

As Lilly Tomlin's character Ernestine the phone operator likes to tell customers:  "We don't care.  We don't have to.  We're The Phone Company."

So, if an investor doesn't have to care about his monopoly because he reaps the rewards of civilization anyway, other investors will merely "park" their property money in the high bid in escrow for for that monopoly.  Eventually, someone will come along who has a better use for the monopoly -- meaning he thinks he can turn a higher profit with it by, say, firing Ernestine and providing better customer service.  He'll bid higher than other investors and thereby impose a higher demurrage rate on the current owner who will be motivated to get out of that business, and turn it over to the entrepreneur who, unlike "The Phone Company", does "care".

The impact on Internet monopolies would be to clean out the political animals who have latched their suckers onto those companies, there to indulge their whims regarding politics at the expense of the general public.

Meanwhile, the young men who place their flesh, blood and bone between chaos and civilization, will be reaping the network effects of civilization in the form of outbidding the economy for the fertile years of young women, thereby preserving for future generations the very characteristics demanded by the civilization.