Money, capital formation and equity partnership

A solid understanding of wealth is required to ensure the surplus income that you have saved during your earning years is available to be released when you are retired. Not all claims on future income should be classified as 'wealth'. Those claims over what turns out to be poor quality income streams will not provide usable income in your retirement years.

Money is the most marketable good. The most marketable good has near constant marginal utility. Like it or not, over time, space, quantity. and to whom, gold is the most marketable good. Simply put, gold coin is money. Silver is the second most marketable good. 

The most basic form of wealth accumulation is the hoarding and then dis-hoarding of money. The marginal person will sell bonds and hoard of (gold) money when the interest rate of the (gold) bond market is too low based on that person's subjective value assessment.  The marginal person will buy bonds and dis-hoard (gold) money when the interest rate on the (gold) bond market is sufficiently high based on that person's subjective value assessment.

The formation of productive capital is the foundation of the success of capitalism. The Entrepreneur with the loan of funds from the bondholder, together with the use of funds provided by the equity investor, employs people and capital to produce products and services in demand from the consumer. Wealth is a claim to a share of future income (products & services) net of costs arising through the deployment of capital and people.

Wealth therefore relies heavily on the quality of claims on income from the deployment of capital and people. In this regard, the problems arising from our current monetary system do not bode well. In our view, the current situation carries with it many of the characteristics that caused the Great Depression.

Professor Antal Fekete concluded that the causes of the Great Depression are found in the combination of three factors: (1) the fatally relaxed accounting standards, (2) the creation of the Federal Reserve Banks in 1913, making the monetization of debt possible, and (3) the destruction of the gold standard in 1933. He states "These three factors interacted to cause wholesale capital destruction in the productive sector. It was not the collapse in demand that caused the collapse in production, as asserted by the currently fashionable Keynesian and Friedmanite orthodoxy. It was the exact opposite: the collapse in production causing the collapse of demand. The collapse in production occurred in response to the invisible destruction of capital due to the falling interest-rate structure which, in turn, was engineered by the bond speculators, chief among them the banking fraternity".

Hoarding of Money (gold coin)

There is nothing wrong with people deciding to hoard (gold coin) money. The signal that it sends should not be ignored. It tells us that something is wrong with the monetary system. It could be that interest rates have been pushed too low by some agency such as a Central Bank. It could be that capital destruction is expected. It could be the consequences of the application of Gresham's Law, as driven by legal tender laws. However, if gold coin is not in circulation, our social coordination is diminished. There is no point in hoarding gold coin, if you are unwilling or unable to dis-hoard gold coin. We should address the cause of the problem, not a legitimate reaction of people to the problem, such as hoarding gold coin.

Bills of Exchange, Bonds

The real bill of exchange is a form of short-term wealth. The real bill of exchange is commercial credit which is provided to finance fast-moving consumer goods to the market. The real bill of exchange is drawn by the wholesaler and accepted by the retailer. The retailer agrees to pay gold coin to the holder of the real bill of exchange in a set period, normally not longer than 91 days. This bill of exchange can then be used by the wholesaler to form payment to his suppliers. As such, the bill of exchange can facilitate the movement of goods in high consumer demand across the whole value chain. It is a self-liquidating instrument, as at the date of maturity the retailer pays to the holder of the bill of exchange the gold coin that the retailer has received from selling the produce. If the produce is not in high consumer demand, the retailer should borrow using normal bank credit facilities, as the real bill of exchange market should not be open to them. If the holder of a real bill of exchange wants early payment of the gold coin they can take the bill of exchange to a Discount House. The Discount House will pay gold coin to the holder of the bill of exchange, discounted for the number of days remaining to maturity. These discounted bills of exchange become highly valued assets by investors and banks as the holder earns the discount rate with the payment at maturity in gold coin near certain.

Real bills of exchange earn the discount rate. The level of the discount rate is determined by the propensity to consume. When the propensity to consume is high, the retailer will be quickly in possession of the gold coin. He will then use this gold coin to purchase his or, more likely, the real bill of exchange of another retailer. This puts downward pressure on the discount rate. When the propensity to consume is low, the retailer will be slow to be in possession of the gold coin, and at the margin this will put upwards pressure on the discount rate. The discount rate is driven by the propensity to consume, with an inverse relationship.

It was the bill of exchange issued by the goldsmiths that formed true circulating currency.

Real bonds are a form of long-term wealth. Real bonds are the funding vehicle of the entrepreneur for the purchase of capital and/or the employment of labour when the entrepreneur decides not to involve equity partnership. Bonds pay interest in gold coin. The maturity date of the bond should match when the bond can be repaid through the deployment of the capital and/or the employment of labour. A sinking fund should accompany the bond to ensure it will be repaid, rather than rolled-over at maturity. Interest on bond payments have a priority call over revenue, but are fixed in nature.

Equity partnership, Property

Under the current system of irredeemable currency, future wealth cannot be maintained in the currency itself (e.g. by hoarding central bank notes), in the form of fiat nominal bills, or in the form of fiat nominal bonds. In our current monetary system, productive activity is penalised and speculative activity is rewarded. The volume of productive activity constantly shrinks, while the volume of financial activity constantly expands. In the end, the financial markets attract all of the available funds, gobbling up much of the producing sector. As for income from employment, choosing the right equity partner, either directly or through exchange, becomes a very important decision. The equity partner of the entrepreneur participates in the profits and losses of a business. a well chosen equity partnership is a form of long-term wealth.

Property ownership allows the personal use, or the leasing of that use to an external party, of the land and any accumulated capital on the land. The property owner receives a lease payment from the entrepreneur for the entrepreneur's use of that property. The property owner is normally responsible for depreciation of the accumulated capital on the land. A well chosen property ownership is a form of long-term wealth.