Financial Value Revisited

 In my book Conspiracy 101 I criticize Marx for not realizing until after his book Capital was written that capital is not only the means of production; producing earnings, but it also has the amazing quality of expanding financially. You can borrow on capital. Once financial instruments are created based on future values they multiply, they are traded and speculated on. When understanding events, this financial value is far more impactful than simple earnings.

Recent events have reminded me that capital can also collapse. The value of assets is aspirational. Even with earnings people can perceive that the future value will not justify the investment. Oil is an excellent current example. Even with oil earnings you can see that people aren’t anxious to invest. US is not building new refineries to process our light crude. Canada builds pipelines but again a refinery is too much. Venezuela bought US refineries but even with its huge reserves no one wants to invest in a new Venezuelan refinery. China is throttling its oil consumption. US has turned the southwest into a bursting toxic dump draining the shale. We have an oil glut. One of the reasons for the dollar’s fall is the drop in oil value.

In Conspiracy 101, I suggest that oil has taken the place of gold. That we could divide through by the price of oil as we would gold to get true value. Currently this assertion is wrong. The US policy to make the petrodollar a universal currency is failing. So far, gold is the measure of value. Perhaps one day there will be a gold glut.

Under the gold standard there were large financial gyrations. These were caused by financial speculation and competition for wages. Culminating with Franklin Roosevelt a grand bargain was struck:

Immigration became stricter. Before this, waves of immigrants entered the nation at will. Now there are two classes of immigrants: documented and undocumented. The undocumented set the base rate, they are our cheapest labor cushioning market forces replacing the slave labor we used to have. The documented are more expensive providing competition for higher priced labor.

Labor unions agreed to collective bargaining, gave up the wildcat strike and the boycott.

Just as Adam Smith described, managed trade assuaged the prerogatives of manufacturers.

The Federal Reserve in response to government bond auctions raises or lowers interest rates which controls small business formation which compete on wages.

 Social Security ameliorates workers fear of retirement.

Income Tax favors owners over employees.

These are controls on wage inflation; there is nothing restraining capital inflation. Diddling Doddering Doofus first term severely mismanaged wage inflation. Kids in cages pissed off the Mexican undocumented and they quit coming. Since the parents were often refugees, keeping the children created orphans when the parents were forced to return. Fruit rotted on the ground. Stores closed on Mondays. More citizens got hired. The various parking lot worker markets were empty. When the Covid shocks hit the undocumented weren’t around to provide their cushion.

In desperation, Biden let in a lot of documented. They were papered coming through the door. There was some dumb glitch with work permits. I don’t know how the inflation would have been if Biden hadn’t acted. Problem is that documented don’t set the base rate, so it took a lot more. The Federal Reserve still had to raise interest rates to sell T-Bills making our debt more expensive. Second term closed the border to documented refugees who may someday vote, and let the undocumented back: fruit is harvested, stores are open, there is more unemployment, the parking lot hiring has returned. Wage inflation will subside.

The inflation shock called dollar’s value into question. If US can’t even manage our labor market, why is anything else working? Just like unitary executive, managed trade gets a horse laugh. Without stability, what advantage is there to American Empire?

US has demonstrated our ability to control the frequent wage inflation cycles. What we lack is the mechanisms to control the severe capital inflation cycles. Holding wages in check makes capital more volatile. Thomas Piketty in Capital in the 21^st Century wants to tax capital as we tax real estate.  If the tax is fair, it won’t be effective. Capital exists as relative advantage. After tax, everyone will be in the same position as before.

Reagan got rid of the capital gains deduction as a reform. This should have been a step on removing the advantages owners have over employees. Instead, it was used to excuse tax cuts and then lost to a concerted lobbying effort by Bill Gates. 

As my brother says we shouldn’t have two classes of taxpayers. Currently we are taxed on our income. If companies were also taxed on income rather than earnings maybe that would be sweeping and radical enough that it could not be easily changed back. Initially this should lead to much lower tax rates. My fear is that inevitably the tax rates would creep up. This should be more than offset by removing the tax advantage of corporations. Rather than taxing the assessed capital asset we should remove the tax value of corporate assets.