CREATING ABUNDANT INVESTMENT OPPORTUNITIES

Central point: The resources of the planet are dangerously stretched. We need to protect the existing resources and add new ones, which require massive amounts of new investments. We also need massive amounts of investments to keep us all employed. We need to look at investments under this new light and measure them with new yardsticks.

 

The productive powers of the global economy have tremendously expanded. The output of an economy is either used in consumption or in investment. Consumption was never enough to employ the whole economy; more so today because of the expanded production capacity and also because of the resource and environmental constraints. Resource and environmental constraints require that we increase the proportion of clean and resource creating products e.g. windmills, which usually are capital intensive and require investments of large sums of money. High levels of investments are needed not only to employ the expanded labor pool and production capacities but more importantly to create new resources and produce new products and services to meet the needs of the growing population while remaining within the resource constraints of the environment and that of the planet.

It is important that our full economic potentials are realized because the growing human population and its rising standards of living require that we add resources and production capacities without depleting and ruining the planet. Planetary constraints and the growing human population have put extra ordinary demands on our production capacities: we have to produce more while using less of the planetary resources. Producing more while using less of the planetary resources e.g. fossil fuel, entails using more capital which ultimately translates into large volumes of investments. That means employing the growing population and production capacities should not only be easy, it is in fact the need of the future. Then the obvious question is why we are having so much difficulty employing labor, even in developed countries.

In this respect the case of Japanese economy is very instructive; they have been having difficulty achieving economic growth for so long because they haven’t succeeded in finding new things to do with their productive capacity. The things they do well have already reached or are approaching over capacity in the global economy. They have to find additional things to do that translate into economic value. The environment related infra structure and industries could have been their obvious route but they have not chosen that route on any significant scale. The result is that they remain stuck in a flat or negative growth for so long. The fossil fuel powered economy has taken them as far as they have come; now fossil fuel is doing the same for China, India, and others.

Even something far fetched like a major space program would have enabled them to create value and achieve better economic growth. Given the increasing human interest in space, a well thought space program would produce economic values. Economic value does not have to translate into instant consumption power it could also be in the form of increased possibilities or enhanced potentials for the future. We are in an era where resources and potentials and future prospects would have to be built or developed. Investment would have to be made to increase potentials and to build opportunities for the future.

Germany did not face the economic growth problems as that of Japan because of its reunification with East Germany. The work and the associated value created during the rebuilding of the Eastern part of Germany provided the German economy the investment and employment opportunities that was nowhere in Japan. The creation of the European Union could have similar results if, for instance, Greece was more like East Germany, in the West German eyes, than it is. The European Union is a project in the making and we have yet to see how it delivers value to all its members, not just transfer from one to the other. East Germany was probably the last of the value creation opportunities that arose from the ruins of the Second World War. Prolonged peace will make such value creation opportunities rarer as more of the world folds its curtains and tears down its walls. Going forward, we have to find ways of creating value that does not involve a prior destruction.

The key to Japan’s and other developed countries’ future economic growth lies in their ability to make ever increasing investments for the future. Japan can easily see the possibilities and potentials for investments related to environment and other planetary resources, and it has the labor and capital to make those investments; it just needs the right yardstick for making those investments viable. The old financial rate of return based yardstick needs some augmentation.

The old valuation yardstick

Economies can only grow if they continue to produce greater value. China can certainly create value by adding another coal plant but the U.S. or Japan can’t be as certain; the benefits still outweigh the costs in China just because of its level of development, its income level, and its standard of living. Significant economic value in developed countries is likely to come from investments that are highly sustainable, or in other words from investments that use little or no fossil fuel.

The value from lower use of fossil fuel stems from the possibility that, as we can see, in future the price of fossil fuel will be higher, either due to environment related regulations and taxes, or due to supply shortfalls, or both. Since that value will be realized in the future that is not soon enough to beat the effect of present value discounting; that value is getting lost in the discounted cash flow valuation process. If we wish to see those values reflected in business decisions we have to eliminate the reason for discounting: interest. If interest was eliminated those values would start showing up in calculations even today the same way they show up in our thinking, intuitions and feelings.

Reduction in fossil fuel usage will translate in reduction in rate of return under the present financial system. As mentioned earlier, fossil fuel delivers far more energy per unit of capital than that delivered by environmental sources of energy. However, if the cash flows from both the fossil fuel and the environmental energy sectors were compared without discounting they would show comparable returns, assuming that fossil fuel prices go up as supposed in the paragraph above. The better performance of fossil fuel per unit of physical capital will be offset by free energy from the environment and the increasing costs of fossil fuel.

The cash flow stream from fossil fuel driven businesses show good cash flow in the near future which are discounted by lower factors because they are near, the far end of the clean energy sector may show better cash flow but due to higher exponential discounting they get diminished in the final tally. The interest rate discounting method is heavily favoring the fossil fuel driven industries. The interest rate system values future in an exponentially diminishing manner. The exponential part of discounting is definitely wrong and is distorting our valuation of the future. It is a severe kind of myopia and is really in the way of our adapting to a major change in economic geology of the world.

Changes in return accounting

The per-year and the per-cent return concept will remain applicable because efficient use of money, or capital, does require these measures. We cannot have an efficient capitalistic system without these measures; however, compounding is not necessary at all. The system as proposed here will remain arbitrage free after elimination of discounting and compounding, given a properly structured asset tax structure.

There will be a business model for borrowing long and lending short, or vice versa, with its risks and reward. There is little risk that discontinuing interest and exponential discounting will give rise to any economic or logical inconsistencies and impasses. In fact the economic system will function better because of elimination of interest which is “unnatural” and has basic logical and economic inconsistencies which distorts the natural functioning of the economy. Automatic exponential growth in an asset – there is nothing as unnatural and as fundamental in our lives as interest.

The valuation myopia

Let us look at a numerical example and see how discounting effects return calculations and how it excessively diminishes the value of cash flows that come later.

A 50 year investment of $100 providing a $5 cash flow every year and returning the capital in the 50th year will yield 5% return according to the current compound interest method of valuation; and according to the proposed non discounting method of accounting the return will still be 5%. $250 received over 50 years (5*50=250) is 5% per year.

If the $250 interest plus capital $100 (total $350) was received in the 50th year the return would still be 5% according to non compounding method of valuation. However under the compounding method this bullet payment of $350 ($250 plus capital) would only provide a return of 2.5% per annum (annually compounded). The change in method from non-compound to compound method cut the return in half.

To earn a 5% compounded return the same $100 investment would require a bullet payment of $1150 in the 50th year. In a non compounded method the bullet payment of $1150 will translate into a return of 21% per annum. The change of method here multiplied the return more than four times. The main reason for such a big jump is the timing of the cash flow which is in the distant future. Since we know that environmental energy projects will perform better with time, and particularly so late in the future, we need to have a non-compounding method of valuing future returns.

The point being made here is that elimination of interest and consequently the elimination of compounded discounting method of valuation will very significantly improve the return competitiveness of environmental energy projects because their distant cash flows will not be discounted or diminished. There is no reason to exponentially discount cash flows for time, except for interest. Distant cash flows from clean energy projects will be better than fossil fuel based ones because of advantaged asset tax rates, better efficiencies and synergies being achieved in clean energy and also because of the expected increase in fossil fuel prices.

It is quite possible and may be even likely that a 20 year investment with 5% non- compounded return may be preferred over a 15 year investment with the same annual return. If the return is good for 15 years it is likely to be preferable for 20 years if the investor wants to take his money 20 years in the future. Under free capitalism people will be interested in carrying their savings farther because of asset tax; therefore, there is an economic value in carrying an investment forward. This value in carrying forward will be countered by our needs for liquidity. The reinvestment risk in free capitalism will be a very significant factor in making investment decisions; therefore reinvestment risk (and cost) along with asset tax will counter liquidity preference tendencies.

Expanding investment horizons

Additional investment opportunities can be identified or created by expanding horizons in time and space. The resource and environmental constraints imposed by the planet require that we use highly capital intensive processes to convert wind and sunshine into energy and use other capital intensive processes to conserve energy and protect and heal other resources of the planet. Most of these investments have a pay back period that exceeds 20 even 30 years. Lengthening of return time horizon of investments is the natural outcome of greatly increased environmental and resource constraints on our economic activities.

The global economy needs increasing proportion of longer term investments to produce the needed economic value to raise the standard of living of the growing population without ruining the planet. The limited amount of investment opportunities that is available within the approximately 30 year horizon that our financial system generally permits is not enough to create the amount of economic value that we need to create to meet the growing demands of the growing populations under the environmental and resource challenges of this century.

The approximately thirty years of return horizon that our current economic system allows will not permit creation of value that our global economy is capable of producing, therefore preventing our full economic potentials from being realized.  It is obvious that more investments will be undertaken if our investment horizon is sixty years. Higher investments will certainly translate into higher employment levels. Japan would continue to grow if its investment horizon were substantially increased.

As we all know that there are plenty of investments that continue to produce returns after 50 years and even after 100 years. The artificial limiting of the time horizon to thirty years (or so) is the artifact of interest. Space and many environment related projects will become feasible when considered over long period of time of, say 50 years or more. Lengthening of time horizon will create a whole new range of investment opportunities that cannot be considered under the current financial system. Significantly expanding time horizon will make environmental revolution a likely outcome.

Lengthening of time horizon will also allow us to expand our horizons in space, literally outer space. Space offers us good investment opportunities even today but due to the time horizon constraint imposed by our financial system; none is considered. The space and clean age industries will require huge investments in development and research work for them to mature and become economically competitive. Once these technologies become competitive they will provide us with a means of export that will keep us all employed for a long time to come. However, the present economic system will not allow investment in those industries because their pay back time is currently long and uncertain.

One of the unintended beneficiaries of expanding the time horizon would be our future generations. It is obvious that as payback times stretch farther out in the future the chances and extent of those investments benefiting our future generations increases. The world that our future generations are going to inherit from us will have far less per capita resources than that of the world that we inherited. Given the trend of diminishing income and resource inequalities among the different regions of the world, the pressures on developed countries’ per capita resources are even higher.  It therefore seems appropriate that we make some investments that will benefit our future generations.

Translating social and environmental benefits into financial profits

The great philosopher Aristotle once said: “For that which is common to the greatest number has the least care bestowed upon it.” “Tragedy of the commons” is the name given to this kind of problem in economics. It is the problem that arises when private benefits are achieved at the cost of public good e.g. overgrazing of public lands, dumping toxic waste into a river.

Overpopulation, strained resources, integrated economies, common and shared spaces and resources, overlapping rights over air and water, tremendous abilities to change the course of nature, and a common sky, have made the “tragedy of the commons” a common part of life on this planet. It may have been rare to encounter the consequences of the “tragedy of the commons” in everyday life in the past, but now it is so much part of life that we experience it even in the air we breathe. Since it is basically a problem of economic origins and implications, we need to address in the structuring and workings of our economic system.

New investments have to be made in industries serving the environment and in those developing the potentials and resources of the planet; but since these industries don’t get paid for a major part of their service, which is helping or healing the environment and the planet, their real rate of return is not reflected in their financial rate of return. Public good is invisible to the “invisible hand” in our financial system. In other words since there is no price or remuneration for a major part of their service, their financial rates of returns are low. We therefore need to reward these industries for the common good part of the service they provide.

Since we want these industries to be established we have to increase their relative financial rate of return. We therefore need a financial and economic system that translates collective, social, or environmental benefits that is “the common good” into financial profits. The ability or mechanism to translate social or collective benefits into financial profits for the provider will enable our economic system to promote a sustainable way of life and also to make it profitable for businesses and other private sector entities to invest in industries that enhance sustainability and similar other collective benefits.

Elimination of interest will remove the hurdle or the capital cost that prevent establishment of environment friendly industries. Elimination of interest paves the way for asset tax to work as a means for translating collective benefits into financial benefits. Low asset tax on particular asset or industry will enable us to translate environmental or similar benefits of that industry into financial benefit for the investors. High asset tax will conversely allow us to penalize those that pollute, deplete, or cause other damage to the planet. For example, zero asset tax on minerals left in the ground compared to high asset tax on extracted minerals and on assets consuming those minerals will preserve natural resources for our future.

Asset tax is a much better way to allocate capital than is interest. Asset tax gives us the tool to channel investment towards the environment or any other specified purpose. Asset tax does not have additional financial cost because it replaces income tax as well as interest. Interest is a huge cost and does not enable us to channel savings towards investments beyond an approximately 30 year horizon, or to favor investments that serve the common good. Translation of environmental and other collective benefits into business profits requires a new approach to business and economics. Our current economic system is not designed for that kind of economic translation.

Creation of incentives for establishment of new industries

The emerging economic conditions require that we develop new industries which will give us significant technological and expertise advantage over developing countries.  For our economic lead to continue, those new industries should gain relevance and value with time. In other words, to maintain our current standard of living, we must identify the industries of the future and develop them to provide jobs for our workers, maintain our standard of living, and increase our global competitiveness.

Historically development of new industries has been largely driven by individual, organizational, communal, national, or imperial motives. The industries that are emerging in the twenty-first century, however, have their driving force in environmental, social and other planetary needs and motives. These motives, however, need to be translated into financial benefits for businesses engaged in them; they cannot on their own drive private enterprise.

Now we not only have to prevent the “tragedy of the commons” but also have to incentivize creation of public good by private enterprise. Since profit motive will continue to drive business and industry on micro and national levels; the new industries will not become commercially viable until we are able to provide adequate financial benefits for businesses engaged in them.

Elimination of interest and properly structured asset tax will help us not only avert the tragedy of the commons but also make it profitable for private enterprise to produce public good. For example, zero or low asset tax on industries and assets that have low carbon content and high on those that have high carbon content. Clean energy will not only become profitable but also help protect the environment. Public good has to be incentivized and asset tax is the tool to do that.

The range of incentivized industries will not only include clean energy but almost all industries that use energy. De-carbonizing or low-carbonizing most products will involve most of our economy in some form. Many new industries will come into being because our ways of doing things at home and at work will change. These changes will gradually build into our lives and will continue to spawn new industries and businesses for a very long time.

Non-uniform hurdles for allocation of capital

The whole edifice of our economic system is built upon and around one central value: financial rate of return; as if nothing else really matters or that all goodness, economic or otherwise, is embedded in this single value. So many things that didn’t matter before do matter in this century; and the financial rate of return not only fails to represent those newly emergent values of life but, in fact, works against those values. For example, higher financial rate of return can be achieved by polluting the environment, depleting critical resources, eroding economic potentials, and jeopardizing the future. All values and goodness can no more be achieved by maximizing pure financial rate of return. Life on this planet is not that simple anymore.

Financial rate of return should no longer be the sole criterion for an economic activity to survive or to be undertaken. There should be a set of other “common good” criteria that should be included in the capital allocation process. Asset tax can incorporate the common good criteria through the asset tax rate structure.  Each applicable asset tax rate will serve as a hurdle rate for a particular industry or asset. The higher the common good benefits the lower the tax rate for that industry or asset. The financial rate of return will still play the qualifying role in the capital allocation process, only now the qualifying rates would be different for different industries.

Hurdles, necessary to prevent allocation of capital to sub-par performing assets or investments, should be industry or asset specific; not uniform for all industries. This is the new requirement resulting from the challenges created by the environment, over population, globalization and massive industrialization. All industries are not equal anymore. Some benefit the environment and add to our future prosperity and some do the opposite.

When in future we no longer need to support or favor one industry over other we will just have equal asset tax on all industries (or assets) and that will allow markets to allocate capital without any guidance from society. The difference between asset tax on cash and on other assets will however continue to serve as an instrument for changing the level of activity or stimulus in an economy; the kind of function performed by monetary policy in the current system.

Mechanism for achieving below zero interest rates

If interest rates had the capacity to go below zero then the chance of interest rates going up would generally be the same as going down no matter where interest rates were. That would balance the downside of duration risk with its upside potential. Since interest rates don’t go below zero, lending during low prevailing interest rates is mostly for short terms, which does not help low yielding industries.

We would not have the need to let banks borrow short and lend long, if interest rates could go below zero. Negative interest would incentivize lending including long term lending. The current inability of the monetary authorities to incentivize lending and investment under low interest rate environment as explained by “pushing on a string” metaphor will no more apply. The monetary authorities will always be pushing on a stick – the negative interest or asset tax – and achieving results. Liquidity trap will become irrelevant.

There would be no inherent preference for short term lending under low interest rate environment. Hence we would not have the crisis prone financial system we have today; and have had for centuries. The zero bound interest based financial system is so rickety that governments have to step in all the time and assume all kinds of financial and credit risks just to keep the system running. Interest is market price that fails to match demand and supply under many economic conditions; the present and evolving economic condition is one in which it is utterly failing, particularly because of the zero bound.

The cycle of production, consumption, saving, and investment will run smoothly if interest rates went below zero. No matter how much people saved the saving would find avenues for productive investment. Investments would preserve savings and create incomes. The cycle would continue without stopping because investments would continue even when returns are negative. It would not cause credit crisis, asset bubble or other breakdowns of the system.

The natural order of things in the world is that things decay and lose value, even land goes through it. Assets need expenditure to maintain value, so carrying value forward should have a price. There is a beautiful parable “A story of Robinson Crusoe” in “The Natural Economic Order” by Silvio Gesell; which shows that interest is against the natural order of things. This parable is reproduced for convenience in the chapter on interest; it is also freely available on the internet. The zero bound interest rate system is most certainly unnatural because it does not allow the possibility of decay or erosion of value or allow incorporation of a cost, in carrying value forward. We see the consequences of an unnatural system ever few years in financial system crises.

There is no reason to believe that investments should always have an expectation of positive return. This belief is a product of the interest based system. In fact the availability of interest income is the reason for such a belief. It is called the opportunity cost. Any investment has to be better than the opportunity cost of leaving the money in safe and liquid debt instrument and earn interest. All investments have to beat the interest rate to become viable, which is a requirement all investments cannot beat all the time and as a result we get economic slow down and economic crisis.

Economies and societies go through different stages of progress and reformation. Some times there are plenty of opportunities to make good investment returns e.g. the start of the industrial revolution, the end of Second World War, and sometimes it is difficult to make any positive returns e.g. the 1930s and the duration of current economic crisis.  If we just saw the fact that investment returns can be zero or even negative and still be attractive we would clearly see the need for negative interest rates.

If interest rates behaved as an efficient allocator of capital then we would have environment friendly industries springing up everywhere. The green economy wouldn’t be waiting for government help. We need interest rates not only to go down but to go down below zero. Asset tax will help us achieve the economic equivalent of negative interest rates.

We need to create assets; we need far more assets to accommodate the savings and the production capacities of the billions of new workers and savers. Thus, we need a system that has the ability to direct massive amounts of capital into industries and activities that hold significant promise for our future even though their financial rates of return are low.

Fossil fuel and our financial system

As mentioned in the chapter “Case against Interest” mineral converted into cash earn interest whereas the one in the ground don’t. This creates an incentive for faster conversion of minerals into cash; which results in faster consumption of minerals. Additionally, interest will keep pressuring us to use fossil fuel for production and consumption because of its high productive powers compared to clean sources of energy.

Wind, wave, solar and other environment friendly industries are not able to show good returns compared to fossil fuel because they don’t get compensated for a major part of the service they provide. Fossil fuel based industries on the other hand don’t pay for depleting the resources of the planet and ruining its environment because these things don’t count as cost in our financial system. The economic reason for the relative under utilization of clean sources of energy is two fold: They don’t get paid for the service they provide and hence are not able to cross the hurdle rate of interest, while fossil fuel industries should pay for the resource depletion and pollution they cause but they don’t.

Elimination of interest will remove the hurdle for clean energy industries and make them viable. Higher asset tax on fossil fuel based industries will add some financial cost for polluting and depleting the planet’s resources. Free capitalism presents a two fold solution for a two fold problem in the allocation of capital: It will reward clean industries through low (or zero) asset tax and penalize polluting industries with high asset tax.

Elimination of interest along with properly structured asset tax would enable us to make wind, wave, solar, and similar other clean energy industries viable. The current financial and economic system needs restructuring to enable us to gradually shift to a global economy that is not as dependent on fossil fuel and can still support all of us. Fossil fuel can serve as a bridge to that economy because the initial investment and capital requirements of a fossil free economy are huge. The best use for the remaining fossil fuel may be to help us build that bridge.

Reducing fossil fuel use is good for our economy

If we curb our fossil fuel consumption and lead a global climate change prevention effort it will serve us on many fronts besides improving our chances of continuing to enjoy higher environmental standards of living. It will improve our economic performances in terms of higher investment demand because of establishment of new industries and higher consumption demand because of higher employment and higher income for most people. It will improve our global competitiveness because of lower capital costs, and practically free energy at the national level. Developing new products and industries also improves competitive powers, at least in those newly developed products and industries.

The chapter on climate change has a discussion on the economic and strategic benefits of accepting global warming as a reality. The conclusion there is: From an economic strategy point of view there is no reason for us to deny climate change. Moving forcefully to curb climate change is not only important for the future of the environment and that of human life on the planet, it is also very important for the economies of the developed countries.

Clean energy offers potentials for sustainable economic growth

We are now in an era when forces of waves, tides, air, and oceans have to be harnessed to provide humanity with the energy and resources needed for a modern living. These forces of nature are very diffused, slow, diluted, and widespread as are other forces that drive or sustain the planet; these forces are not nearly as concentrated as fossil fuel. Therefore the technology to efficiently use these forces for production of energy and other products will have to advance significantly to materially improve the input output ratios. As we can see, we are just starting in the direction of producing clean energy and harnessing the forces of nature in this manner; today’s windmills remind me of the automobiles of the 19th century.

The quality of our workforce has been and will continue to be a source of strength for our economy and our exports. Rapid industrialization in developing countries has led to migration of many industries to these countries. We face strong competition in many other industries. We need to create new industries where our educated and highly adaptive workforce and agile labor market will be able show its excellence. Lately the US and other developed countries have not been providing their workforce the opportunities to excel in new and advanced fields and technologies (except for the Internet). There are many examples of new industries being a source of growth to the whole economy, automobile, aviation, and the internet to name a few.

We now need to create industries that build advanced clean energy and environmentally friendly products and services. Clean energy projects will gradually become extremely advanced technologically because maximizing returns from clean energy facilities will require increasingly higher degree of sophistication. The need for rapidly increasing efficiency in clean energy sector is driven by the challenge of maximizing production from weak, dilute and diffused forces of nature.

The drive to increase efficiency is basically a business need for competitive survival in the clean energy sectors. Wind, for example, would eventually have to compete with solar and hydro and other sources of energy. Since all these sources of energy are weak and require huge capital intensive structure, increasing efficiency will always have high dividends. The same is not as true about fossil fuel based energy. The improvement in efficiency of vehicles and other equipments run on fossil fuel has been very small in all of the 20th century.

The pressure to increase efficiency will be there not only from other units in the same sector but from other energy sources as well, including fossil fuel. There will be a trend of gradual technological, know-how, structural and other advancements in these industries which will keep the need for good quality workforce high and will continue to offer good opportunities for investment and economic growth.

It is important to remember that a 2% change in economic growth can make the difference between a healthy economy and an economy in trouble. As we have all noticed; a change in employment levels from 95% to 90% marks the difference between boom and bust. Environmental and other new industries may not be a big part of the economy but they will certainly provide us the edge that we need to grow and prosper.

Enhancing the resources of the planet

Growing human population, along with its increasingly higher ability to exploit the resources of the planet has made preservation of the planetary resources a necessity for our own future and for the future of our children. Preservation of planetary resources will also require investments in planet friendly products and services to make up for the reduction in production of polluting industries. Preservation and optimum utilization of planetary resources has become our collective need.

Since the planet is being degraded by the main stream of our economic activities, our economic system has to be restructured at the foundational levels for preserving the planet’s resources, and possibly for enhancing its production capabilities. Elimination of interest will eliminate the pressure for rapid consumption of resources. Asset tax will enable us to further slow down the consumption of the finite resources of the planet and will also help us slow down polluting industries and activities. In addition, asset tax will also help establishment of new environment friendly industries.

The growing global population and increasing per capita consumption require us to increase production and increase productive resources. Eliminating interest would expand the volume of productive resources under use by bringing more resources like wind, waves, sunlight, and even oceans with lower efficiency of capital under economic use, and as a result will also bring more labor under employment and more land under production.

As we all know that interest sits at the foundational levels in our economic system and influences economic activities at every level throughout the whole economy. Elimination of interest will eliminate the inherently exploitative nature of our economic system at the foundational level. Asset tax can be made to perform the function of interest in a planet friendly manner. Asset tax will ensure that resources or capital are efficiently employed. We need a fundamental and systemic solution, like the one being proposed here, not a patchwork like a subsidy.

Leveraging our clean energy resources

Forces of nature like gravity, air, sunlight, waves, tides, and oceans have to be harnessed to provide humanity with the energy and resources needed for an environment friendly living. Harnessing the natural flow of energy is a very capital-intensive business.  A one-gigawatt wind facility costs more than $2.5 billion to build, whereas a gas facility of the same capacity costs $600 million. Huge capital structures are required to capture the free flow of energy in the nature and transport it to homes and industries. Tidal wave or tidal power generation facilities like barrages, tidal stream power generation, and other hydro electric projects are all very capital intensive but have little running costs. Increasing capital intensities will remain a trend and a necessity for success in environmental energy industry for the foreseeable future.

When we replace fossil fuel with wind, solar, or any other environmental source of energy, physical capital per product or worker goes up as a consequence. We are in effect replacing the work done by nature over millions of years in the formation of fossil fuel by the work done by huge capital structures. Another way of looking at this increase is that we are employing more physical capital and labor for producing the same product or service so as to avoid the economic and environmental costs of using fossil fuels. Replacement of fossil fuel will take place either through capital or through labor.

Harnessing the power of nature will enable us to benefit from the enormous supply of clean energy resources we have in our country.  Wind turbines, tidal wave or tidal power generation facilities, and other hydro electric projects can be built in the oceans off the Atlantic and Pacific coasts. The wind corridor that runs from Texas to the Canadian border, the coastlines, and other areas rich in environmental energy resources can be put to work to maintain high standard of living and increase our productivity.

More capital as we can easily see is the answer to the environmental and economic demands of the time. However our current economic system would not allow such massive investments to take place because the returns from these investments would not be higher than the current and potential interest rates. We, therefore, need to change our economic system to make environment friendly sources of energy and life styles economically attractive.

Thus, we need a system that has the ability to direct massive amounts of capital into industries and activities that hold significant promise for our future even if their financial rates of return are low.

Creating good quality employment

In this stage of mature global industrialization it is obvious that we can’t maintain the lead in our income and standard of living just by being industrialized for a longer period of time. If China goes the way Japan did in the last century we are very soon going to have unemployment and poverty all over the developed world. We need to have a strategy for continued economic growth that fits into the emerging economic, environmental, demographic, and other conditions around the world. We also need new lines of work and new industries that create opportunities for us to excel and lead. If we keep ourselves stuck in the old fossil fuel based economic model there will be little growth for us and we will destroy the environment and the planet.

Developed economies will have to find a way to establish new industries that are environment friendly, and will provide high-paying jobs. Jobs in industries that require high levels of precision, sophisticated designs, high skills, knowledge and training will inevitably pay well. The real challenge therefore is to create industries that require high level of expertise, skills, knowledge and training. Fortunately most new industries, including clean energy and space have those features. An evolving, growing, and dynamic industry is the best job security for skilled workers in developed countries.

New environment friendly economic system would allow us to develop really advanced and efficient systems to produce clean energy. They would provide our workforce a way to excel and create value to justify their higher wages. In the emerging economic and industrial landscape developed countries can only maintain a lead by producing really advanced products. It is not an unlikely scenario where the US will import lesser value windmills from a country and will export (or build) high value windmills to the same country.

Technology to efficiently harness the energy and resources of oceans, tides, air, and earth is a long way from maturing. Countries and companies that invest in these and other advanced technologies like the space technology and technologies for ocean culture will certainly see relatively good returns in years to come. The development of these new industries that are environment and planet friendly will give us back our economic advantage and competitiveness. We can easily visualize a future in which we export huge amount of advanced products and services with high environmental, social and cultural content that will more than offset our imports of everyday products.

New and dynamic industries will evolve in every part of the economy including the clean energy sector. De-carbonizing or low carbonizing will change most of our economy and our public and private spaces. Once we have the power of asset tax in our kit we can encourage a range of new industries in any sector including healthcare, communication, transportation, food, education and any other sector that will help develop new and high value products and services. Industries and economic activities that increase good quality employment and provide high quality products and services can be encouraged through lower asset tax. Since it is asset tax we can narrow low tax incentives to particular assets or types of assets in a particular industry depending upon the contribution it makes to social, economic and other objectives.

If inner city education is lacking we can incentivize better educated and driven teachers to be there through low asset tax on their and their employers’ assets. Many talented young men and women would take the job if right incentives were in place. If elderly care is lacking we can do the same. In an interest free, asset tax driven economy employment will never be the problem it has been for centuries. It is always the fault of the system if willing, able and educated people are not able to find jobs.

Prosperity, standard of health and living, happiness, and quality of life are all going to be redefined in the coming years and decades. The challenges, the available resources, and the needs we faced in the past helped us determine these standards in practical terms; now we face a new set of realities and we will redefine these standards again in practical terms.

High consumption levels that defined prosperity for so long may no more be the most preferred way to define prosperity. Whichever way we define prosperity its practical manifestation will certainly include high employment. We cannot have prosperity without high employment in the emerging world. We will need an economic system that allows these redefinitions and allows us to adapt to the new economic and physical environment that is evolving right before us. We need an economic system that allows us to create employment by design.

Meeting the challenge of low wage competition

Although the American workforce has for some time shown higher growth in productivity in comparison to its European and other counterparts, extremely low wage competition from developing countries is not allowing that productivity growth to be translated into effectively competitive pricing of the end product.  The difference in wages between the developing and developed countries is too big to be offset by the gains in productivity.

Our nation, which still enjoys a leadership position and has the largest and most advanced economy in the world, has to come up with new industries to replace the departing ones. New industries will help us maintain our global leadership and will also provide us the lead in technology, innovation, skill, know how, and other advantages necessary for enjoying one of the world’s highest standards of living.  Moving the competition to new industries where we will have the lead is an obvious way to meet the challenge of low wage competition.

If a significant number of our workers compete directly, using similar equipments and capital costs and producing the same things, with workers in China and India, their wages will tend to equalize with their counterparts in China and India. Therefore one way to meet the challenge of low wage competition is to move the competition to new industries.

Major reduction in our cost structure will reflect in our global competitiveness

Globalization has brought competition from low wage countries to our door steps. We need to reduce our input costs in the manufacturing process to offset some of the wage advantage that developing countries have. Interest accumulates in the cost structure at many different levels and keeps building up in the cost of almost everything we buy. Around 50% of the amount most of us end up paying for a car is interest.

Eliminating interest would reduce costs of every component of our product cost. Our wages could be lower because they won’t need to have a component to pay for interest and for fossil fuel, our materials would cost less because they would not have any interest component, our fixed cost and capital cost component will be significantly reduced. We would be able to compete globally and maintain our standard of living as well.

For us to compete effectively in the global markets and manage to maintain a significant wage and standard of living differential between us and developing countries we have to reduce some non-wage costs significantly. Elimination of interest will certainly remove a huge non-wage cost.

Suitability of the new system to the US

Interest hurts us much more than it hurts developing countries, because their growth potentials are still high and their low wages give them additional room to accommodate interest. Interest based system is working against us.

Our ability to attract capital without interest is certainly better than any other country. We can use our currency and credit advantage to attract capital more than any other country. We should use our strengths in ways that are beneficial to us. The US dollar will attract international savings even at zero percent or lower. There is no alternative to US dollar for large international savers. The safety, security, and stability that US financial markets and the US dollar provide and are capable of providing in the future cannot be matched by any other country. The world has more savings than it knows what to do with it; therefore, there is little chance that we won’t be able to attract savings to fund our investments.

Taking interest cost away from our cost structure will significantly reduce our prices and make us globally competitive. By eliminating interest we will also be able to very significantly increase investments in building up our environment friendly industries and their infra structure.

If other countries follow our lead it would not take away our advantage. When they shift to non fossil fuel based growth the pressure on fossil fuel prices and the environment will be reduced. New resources will be added and they would focus more on developing their own economies rather than on exports. Our high credit rating would still serve as an economic advantage. Our talented entrepreneurs, agile workforce and efficient markets will get a fair chance to lead, prosper, and profit.

Improving incentives for investments

Increasing investments requires either increasing marginal returns from investments or bringing the hurdle rate (interest) down, or both. Free Capitalism will do both.

Low asset tax will directly translate into higher profits and better returns in respective industries. Asset tax will also increase returns from certain assets and industries because low asset tax will help the development of a stable and reliable business model for those industries; removing uncertainty improves returns. Since building infra structure for industries with a stable and reliable business model is more productive for governments at all levels, better returns will also come from better availability of relevant infra structure. Stable business models, better infra structure, and a stable network of related, upstream and down stream businesses will all come together to improve returns for all businesses involved.

Assets will have stable values because their value will not be a product of interest driven present value calculations which are very volatile. A 30 year asset can lose more than half its value if the interest rate went from 6% to 8.5%. Asset values will be stable because they will be based only on factors that drive real value, e.g. productivity, material and perceptual utility. Removing interest from value calculations will very significantly reduce asset price volatility not only because of the volatility of interest rates but more importantly because of the heavy impact of interest on valuation. Removal of interest will make the whole economy much stable. Higher stability in values and economic prospects will improve business and economic prospects and consequently increase demands and returns from most investments.

The money (or value) that currently goes towards interest and oil imports will go towards profits and wages. Higher profits will translate into higher returns from investments. It will increase the incomes of both businesses and workers, resulting in a large and affluent middle class. A larger middle class will provide stable demand and price stability to businesses and therefore improve their profitability.  The whole society will be wealthier because there will be more assets and stable values. Higher incomes, higher wealth levels, and higher employment will all contribute to higher demand and better and stable returns from businesses.

Asset tax will also lower the return threshold for investments, including bringing it down to zero. This is the same as reducing interest rates in the current system. We can have industries and assets with zero asset tax. Under an asset tax system we can have viable industries with zero percent rate of return on capital as long as they help us achieve social, environmental, or other collective objectives. These industries will represent an increase in investment that would never have happened in an interest based system.

Once we institute asset tax or make other similar changes to our economic system in order to accommodate the emerging realities of the environment and globalization, and those changes are subsequently considered by investors to be adequate to deal with the current and potential economic problems; the momentum for new investments will pick up. Faith in the continuity of the relevant components of the system will help investors to capitalize on the investment opportunities that have and will become available. Clarity, vision, and confidence in future outcomes and towards the future always help improve investments and their performance. Uncertainty and lack of viable investment opportunities is currently the main obstacle to a robust economic recovery.

The factors causing the environmental and resource related problems are also the key to its solution

Large number of people joining the free market workforce has increased income and income potentials all around the world. More than three billion people now compete in the global markets and have economic benefits of industrialization. Mechanized industrialization enables people to produce much more than they consume. The capacity to produce goods and services has gone up tremendously. Given the demands of the environment and the consequent need for huge amounts of capital resources; this increase in productive capacity is particularly helpful. The need for adding capital structures and facilities for protecting the environment is in perfect synch with the availability of additional workforce and production capability.

More income enables higher saving. The world needs huge capital investments in clean energy and other industries; fortunately the world has huge savings as well to provide the capital. Therefore the increase in savings is in synch with the need for adding more capital resources for environment friendly economic activities and for preserving the resources of the planet. Higher savings demands higher investments; and this demand for investment is in synch with our need to increase production and employment.

Our growing population and the current, fossil fuel based, production capacity is causing the environmental problem. The same population along with their production capacity is providing us a way to build a new and sustainable future. We have work to do and we have the people and the resources to do it. The whole complex of environmental and economic forces interacting with each other is evolving into a new and sustainable equilibrium. We have everything we need to build a sustainable future. The only “unnatural” thing standing in the way is interest. The great Greek philosopher Aristotle was probably the first to characterize interest as unnatural.

In short, the growing world population, globalization, and industrialization has created the need for higher investments in environment, resource protection, and planet related industries and the same factors have contributed to higher savings and production capacity available for such investments. We just need the right economic system to let this happen.

Inflation not a threat

In a world with high unemployment and high industrial capacity we should not be afraid of inflation caused by high rate of real investments. Even if some temporary inflation is created during the time it takes for investments to work its way up to increased production this inflation would at least have solved some unemployment problems.

It is important to note that if we have good investment opportunities and we do make higher level of investments; savings will automatically follow. Investments always equal savings. Investments would raise income and income would raise savings to eventually cover investment in a non inflationary fashion. If there is significant under employment in the economy there won’t be much inflationary pressure.

The world already has more savings than it knows where to invest productively and as a result keeps creating bubbles or asset price inflation. Shortage of real investment opportunities creates the new kind of inflation: asset price inflation. The world has additional savings to invest and the world needs real investment in many new industries. The savings that are being wasted in asset bubbles and credit crises could very well be invested in new industries. There is really very little danger of inflation under the current real (non-monetary) economic circumstances if investments pick up. In fact high investments will create new assets and therefore keep asset price inflation, a more harmful form of inflation, under control.

Advancement in methods and practices of pricing risk

If discounting is discontinued the annual return concept will, however, under go some change. Return on risk may not continue to be accounted for on an annual basis. Return per unit of risk concept will be relatively more relevant than it is under the current credit system. Since risk is priced along with interest on a per annum basis it is only roughly accounted for. If restaurants had to sell dinner by weight then our palates would not be as discerning as they are now and we wouldn’t develop the fine tastes for dining.

Discontinuation of interest will make risk valuation and assessment very important and sophisticated because it will be the major source of income for lenders and it would not be sold by time period but by risk units.  Better and transparent methods of pricing and assessing risk will make business costs stable and predictable. Fair and efficient pricing of risk will significantly improve the rate of business success and other economic performances.

The Environmental Revolution

The growing world population and its rising standards of living are putting increasing pressure on the planet. The limits of the planet require a change in the composition of our economic activities from those of exploiting the resources of the planet to those of preserving and protecting the limited resources of the planet. The trend of increasing influence and proportion of fossil fuel in the global product mix needs to be reversed.

Our economic system needs to be restructured to let our people and our businesses take advantage of the opportunities presented by the challenges of globalization and that of the environment. History is full of examples of such changes and upheavals that changed the course of human history. Countries that took advantage of fossil fuel and built their economies based on it were the winners of the last economic revolution: the industrial revolution. Now the days of the fossil fuel are over and it is time for another economic revolution: the environmental revolution. Countries that lead the wave will turn out winners in the years and generations to come.

If we don’t make these or similar changes to our economy; command economies like that of China will start to have advantage over our economy in allocation of capital to industries that are required for modern living in the environmental age.

Let us not let China or other command economy countries benefit from one of the few advantages that command economies have over free market economies: ease in responding to major upheavals. Markets are relatively slow to respond to major upheavals. The loss of strength in the fossil fuel model of economic growth is a major upheaval that our economy needs to adjust to. Asset tax will provide us the tool to respond effectively to the loss of potency in fossil fuel model of economic growth and benefit from the potentials of the environmental revolution.

Our economic system needs adjustment to adapt to the limits of the planet that are becoming increasingly relevant with the growing population and rising standards of living.

Lead for the global community

By having an effective system for addressing global warming we will again establish our leadership in global affairs of critical importance. Fossil fuel burnt anywhere does the same damage to global environment, so it is important to curb the growth of fossil fuel consumption in developing countries. The longer we wait to implement climate change policies on a global basis the higher the carbon content of developing economies and the greater the vested interests in resisting climate change and other pollution control and resource preservation efforts. The current stance of the Chinese government on climate change efforts is a good indicator of its future resistance to such efforts. The huge fossil fuel based industrial base and structure being built in developing countries will continue to pollute the air for a very long time and make global pollution control increasingly difficult. If we don’t move on climate change soon enough fossil fuel will become a cause for wars and destructions.

By saving less and consuming more we gave a huge chunk of humanity a chance to grow economically. Now is the time to use that growth and lead the world in a more prosperous and sustainable direction. These countries are much more part of the world community than they were ever before. To keep the global community united and working towards common objectives we need a new set of goals and new direction for the global community; and some country to take the lead.

The US can take the crucial next step for sustainable world peace: create an economic growth model that brings prosperity and growth to all of us without costing our future generations. Higher employment will result from adopting a planet friendly economy and way of life. Using the new system, we will increase income by making people look far, wide, and into the distant future for return possibilities, and investing in promising ones.

It is the vision and the possibilities that will drive investments; not just consumption. Saving the earth and going to the moon are not just lofty goals; they are now our economic needs. Going to the moon or mars will help us create jobs, build economic potentials, and unite the world. We need an economic system that helps us build a future that is full of potentials and prosperity, and that can accommodate all of us.

We need a system that has the ability to direct massive amounts of capital into industries and activities that hold significant promise for our future, even if their financial rates of return are low.

We need an economic system that allows us to use energy conservation as an opportunity to create employment, economic growth, new export markets, and technological progress; and also to lead the world towards a sustainable mix of energy consumption and production.

We need an economic system that frees enough capital and resources to be employed in redesigning and rebuilding a significant part of our homes, factories, infrastructure, towns, and cities.

If we do not open new areas of work for people, societies will create artificial ones through war and destruction.

In a nutshell the global economic and environmental landscape has changed drastically and we do have the means to adapt to those changes; but the yardstick used by our economic system is not allowing us to adapt to the new and emerging conditions on this planet. We need a new yardstick for investment returns that will allow us to make the necessary investments for adapting to the new environment and prospering in it.

 

Chapter 7

Table of Contents