Research suggests that when the rich bank, the rest borrow(review.chicagobooth.edu)
review.chicagobooth.edu
Research suggests that when the rich bank, the rest borrow
https://review.chicagobooth.edu/economics/2021/article/how-1-percent-s-savings-buried-middle-class-debt
212 comments
Take cars, no one buys a new car with cash anymore - they are all financed which means people can afford to spend more on a car, which means cars are more expensive.
Cheap finance is the fuel to inflation and corporations love dousing those flames and getting their revenue figures higher.
Cheap finance is the fuel to inflation and corporations love dousing those flames and getting their revenue figures higher.
I'm not a car nerd, I don't want a car. I want to transport me where I want to go at a certain level of comfort, reliability, cost, privacy, speed etc.
If I can get that for $200/month for a new car for 3 years then hand it back, with just known costs of insurance and gas, that's valuable. I don't care what the cost of the car is, only what the cash flow is.
Sure, I could buy a car for $5k and hope that it's cheaper over the 3 years, hope it doesn't depreciate too much, and after 25 months (plus however many months to pay for the extra maintenance and servicing included in the first car) but I'm taking the extra risk. Maybe I'll come out on top, maybe I won't.
Interest rates have been at record lows for over a decade, but the cost of the basket of goods the typical person buys hasn't changed much.
If I can get that for $200/month for a new car for 3 years then hand it back, with just known costs of insurance and gas, that's valuable. I don't care what the cost of the car is, only what the cash flow is.
Sure, I could buy a car for $5k and hope that it's cheaper over the 3 years, hope it doesn't depreciate too much, and after 25 months (plus however many months to pay for the extra maintenance and servicing included in the first car) but I'm taking the extra risk. Maybe I'll come out on top, maybe I won't.
Interest rates have been at record lows for over a decade, but the cost of the basket of goods the typical person buys hasn't changed much.
> If I can get that for $200/month for a new car for 3 years then hand it back
So, that's $7200.
> Sure, I could buy a car for $5k and hope that it's cheaper over the 3 years
There's no hoping, of course it's way cheaper. $5K is less than $7.2K even if you dump the car off a cliff after the 3 years. But you wouldn't, you own it so you can sell it (unlike the lease). A car that you buy for $5K is so far down in the depreciation curve that it doesn't depreciate much anymore, you'll be able to sell it for close to the purchase price. If you sell it for $4K, that's a total cost of $1K for 3 years vs. $7.2K for the lease. No comparison.
On both choices you still have insurance and operating costs on top, both have those. Insurance is bound to be much cheaper on the older cheaper car. In fact you can go liability-only on a $5K car, who cares. But on a lease you're forced to pay full coverage on a new car, far more money.
So if you want to enjoy the luxury of a new car lease, enjoy! But there's no way to justify it on economic terms.
So, that's $7200.
> Sure, I could buy a car for $5k and hope that it's cheaper over the 3 years
There's no hoping, of course it's way cheaper. $5K is less than $7.2K even if you dump the car off a cliff after the 3 years. But you wouldn't, you own it so you can sell it (unlike the lease). A car that you buy for $5K is so far down in the depreciation curve that it doesn't depreciate much anymore, you'll be able to sell it for close to the purchase price. If you sell it for $4K, that's a total cost of $1K for 3 years vs. $7.2K for the lease. No comparison.
On both choices you still have insurance and operating costs on top, both have those. Insurance is bound to be much cheaper on the older cheaper car. In fact you can go liability-only on a $5K car, who cares. But on a lease you're forced to pay full coverage on a new car, far more money.
So if you want to enjoy the luxury of a new car lease, enjoy! But there's no way to justify it on economic terms.
No it's not, it's $5k plus maintenence which can easily run to $2k to get it through the annual test, so that's $11k and will massively deprecate. There's then the opportunity or finance cost of that $5k.
$5K + $2K is not 11K, I don't understand how you get to that number.
Also unless you get exceptionally unlucky (it can happen but is very rare), you're not spending 2K on maintenance. Even if you do, that's $7K, which is still less than the example lease payments of $7200.
Don't forget the lease payments are just rent, the money is gone forever.
The used car you can sell later and recover most of the cost.
Also, it will not "massively depreciate". How often have you done this? The idea is to buy a car that has already bottomed on its depreciation curve and then sell it a few years later with barely any loss.
If you want affordable transportation that's the way to go. Buy an early 00's Corolla or Civic for $3K-$5K, spend nothing on it, sell it a few years later for nearly the same money.
Also unless you get exceptionally unlucky (it can happen but is very rare), you're not spending 2K on maintenance. Even if you do, that's $7K, which is still less than the example lease payments of $7200.
Don't forget the lease payments are just rent, the money is gone forever.
The used car you can sell later and recover most of the cost.
Also, it will not "massively depreciate". How often have you done this? The idea is to buy a car that has already bottomed on its depreciation curve and then sell it a few years later with barely any loss.
If you want affordable transportation that's the way to go. Buy an early 00's Corolla or Civic for $3K-$5K, spend nothing on it, sell it a few years later for nearly the same money.
5k + 2k a year for 3 years = 11k
Last time I had a used non-banger car I had it for 4 years, it cost 16k upfront, I sold it for 3k when it started having engine problems, having spent thousands on it trying to keep it working (electrics were a big problem, but it was when oil started appearing in the radiator that I gave up). did about 50k miles in it.
Too much hassle, stress and money.
Last time I had a used non-banger car I had it for 4 years, it cost 16k upfront, I sold it for 3k when it started having engine problems, having spent thousands on it trying to keep it working (electrics were a big problem, but it was when oil started appearing in the radiator that I gave up). did about 50k miles in it.
Too much hassle, stress and money.
But that's basically an example of what I'm suggesting to avoid (if cheap transportation is the goal, that is). You bought a car with tons of depreciation still to go and sold it cheap. The person who bought it from you for 3K isn't going to experience much if any depreciation from there. I'm suggesting, be that person.
My current commuter car I bought it for 4K eight years ago and the only expense is a yearly oil change and tires every few years. Since I don't commute anymore, thinking of selling it and have been getting offers for 5K.
My previous commuter I bought for 6K and sold 15 years later for 3K.
My current commuter car I bought it for 4K eight years ago and the only expense is a yearly oil change and tires every few years. Since I don't commute anymore, thinking of selling it and have been getting offers for 5K.
My previous commuter I bought for 6K and sold 15 years later for 3K.
I'm in the UK and I have really noticed in the last few months that life is getting more expensive - eating out is 10-20% more, groceries are up 10-20%.
Now this is partly brexit, partly covid, partly we stopped doing anything for months - I can see people getting a bit of a shock when they realise that everything has gone up (the RPI in the UK is the average cost of a set of items in a basket and this confirms it, massive drop last year and now higher than the trend line shows it should have been: https://www.ons.gov.uk/businessindustryandtrade/retailindust...) - will be interesting to see if this drops down again next year
Now this is partly brexit, partly covid, partly we stopped doing anything for months - I can see people getting a bit of a shock when they realise that everything has gone up (the RPI in the UK is the average cost of a set of items in a basket and this confirms it, massive drop last year and now higher than the trend line shows it should have been: https://www.ons.gov.uk/businessindustryandtrade/retailindust...) - will be interesting to see if this drops down again next year
Our grocery bill is actually down over 18 months, and we rarely eat out but I comments how surprisingly cheap it was yesterday.
RPI is not used by anyone as a serious measure of inflation, CPIH is the standard used and it's been really low for donkey's years
RPI is not used by anyone as a serious measure of inflation, CPIH is the standard used and it's been really low for donkey's years
> I'm not a car nerd, I don't want a car. I want to transport me where I want to go at a certain level of comfort, reliability, cost, privacy, speed etc.
No need to waste money on a lease. Just buy a used Toyota at effectively 30-50% the cost of that lease you're getting.
No need to waste money on a lease. Just buy a used Toyota at effectively 30-50% the cost of that lease you're getting.
No need to waste money on cloud computing. Just buy a used Xeon server at effectively 30-50% of the cost of that cloud compute you're using.
> No need to waste money on a lease. Just buy a used Toyota at effectively 30-50% the cost of that lease you're getting.
The poster made it clear that he knows there are cars out there in the 50% range of the cost of his lease, but still thinks it's worth leasing. He said he believed the reliability (and presumably warranty) and improved style were worth it.
Which is fine. He's making a reasonable choice.
The poster made it clear that he knows there are cars out there in the 50% range of the cost of his lease, but still thinks it's worth leasing. He said he believed the reliability (and presumably warranty) and improved style were worth it.
Which is fine. He's making a reasonable choice.
OP said nothing about style. My point is that a slightly used Toyota defies all of OP's concerns:
"hope that it's cheaper over the 3 years, hope it doesn't depreciate too much, and after 25 months (plus however many months to pay for the extra maintenance and servicing included in the first car) but I'm taking the extra risk. Maybe I'll come out on top, maybe I won't."
It definitely will be cheaper over the 3 years. Won't depreciate too much. Really won't have maintenance and servicing needed anymore than the lease. They aren't taking any risk and will come out on top. I know this, because lease financiers already bake all this into the lease for more unreliable cars with a hefty margin for extra profitability.
"hope that it's cheaper over the 3 years, hope it doesn't depreciate too much, and after 25 months (plus however many months to pay for the extra maintenance and servicing included in the first car) but I'm taking the extra risk. Maybe I'll come out on top, maybe I won't."
It definitely will be cheaper over the 3 years. Won't depreciate too much. Really won't have maintenance and servicing needed anymore than the lease. They aren't taking any risk and will come out on top. I know this, because lease financiers already bake all this into the lease for more unreliable cars with a hefty margin for extra profitability.
>OP said nothing about style
"a certain level of comfort, reliability, cost, privacy, speed etc."
His point was he knows he is paying more because he has to think less. He's paying for convenience and risk-aversion (and a slightly newer ride). That's fine as long as he recognizes it as an optional luxury expense.
"a certain level of comfort, reliability, cost, privacy, speed etc."
His point was he knows he is paying more because he has to think less. He's paying for convenience and risk-aversion (and a slightly newer ride). That's fine as long as he recognizes it as an optional luxury expense.
Think less and stress less when it comes to the MOT
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This is because when a bank loans out money in most modern countries they in turn borrow the money from a federal reserve bank which in turn just creates the money to be loaned out. This is how federal reserve banks create more money. The idea being that loans drive the economy through building businesses and infrastructure but it also has the side effect of driving up the cost (inflation) for consumers of everything that can be paid for with loans: houses, cars and higher education and most of those things don't grow the economy in the same way a business loan would.
Commercial banks are where money is created. When a commercial bank 'makes' a loan, they do just that: increase the balance in the borrower's account (from the bank's perspective, this is counted as a liability), and the loan contract is also created (this is effectively a bond issued by the borrower, which is an asset now held by the bank).
In a fractional reserve system, the commercial bank is allowed to loan out money in this way up to a set limit based on the amount of reserves they hold at the central bank. The interest rate of the central bank is the rate at which the central bank pays out interest on those reserves, not anything to do with the central bank lending money.
This paper sets everything out in detail: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
EDIT: this explanation is the 'traditional' way, before central banks started doing QE. In QE, central banks purchase bonds and other assets, effectively 'lending' money out (the bond issuers will eventually, in theory, pay that money back). Still though, nobody is going to the central bank and borrowing money - the bank is buying assets (using money created from nothing, thereby increasing the money supply).
In a fractional reserve system, the commercial bank is allowed to loan out money in this way up to a set limit based on the amount of reserves they hold at the central bank. The interest rate of the central bank is the rate at which the central bank pays out interest on those reserves, not anything to do with the central bank lending money.
This paper sets everything out in detail: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
EDIT: this explanation is the 'traditional' way, before central banks started doing QE. In QE, central banks purchase bonds and other assets, effectively 'lending' money out (the bond issuers will eventually, in theory, pay that money back). Still though, nobody is going to the central bank and borrowing money - the bank is buying assets (using money created from nothing, thereby increasing the money supply).
Buying a car with a loan or a lease is wealth destroying. I don't care whether most people do it or not. If you are smart enough to be reading Hacker News you are smart enough to know that you don't borrow to purchase a depreciating asset. If you don't have the cash to buy a new car, buy used. Buy a beater if you have to. No wealthy or financially savvy person is impressed because you leased a nice car.
> you are smart enough to know that you don't borrow to purchase a depreciating asset. If you don't have the cash to buy a new car, buy used.
This is nonsense. If you can borrow money for less than you can earn, you should borrow. I know people who, buying a new car, had saved cash to do so. But they got 0% financing. So even sticking that money in a CD made them more cash.
What you mean to say is "if you do not realize that you are paying a lot of money for the use of a new car, not for an asset"
This is nonsense. If you can borrow money for less than you can earn, you should borrow. I know people who, buying a new car, had saved cash to do so. But they got 0% financing. So even sticking that money in a CD made them more cash.
What you mean to say is "if you do not realize that you are paying a lot of money for the use of a new car, not for an asset"
>> If you can borrow money for less than you can earn, you should borrow.
You are right, but using a car loan to do this makes no sense. You can always get a lower interest rate loan against real estate or margin loans against stocks. Show me any real world lender that won't loan you money at cheaper rates against those assets than they will against a car.
Sure, people get 0% loans on cars, but if you think they that doesn't mean they paid more for the car than they could have with cash up front.. well I can't help you.
You are trying to make an economic argument and I don't find it very convincing. But in the real world every time have I seen this happen it is to rationalize overspending.
You are right, but using a car loan to do this makes no sense. You can always get a lower interest rate loan against real estate or margin loans against stocks. Show me any real world lender that won't loan you money at cheaper rates against those assets than they will against a car.
Sure, people get 0% loans on cars, but if you think they that doesn't mean they paid more for the car than they could have with cash up front.. well I can't help you.
You are trying to make an economic argument and I don't find it very convincing. But in the real world every time have I seen this happen it is to rationalize overspending.
> if you think they that doesn't mean they paid more for the car than they could have with cash up front.
They certainly don't pay more for the car than they do if they paid with cash up front. The price of the car is negotiated, then financing.
Maybe, if the dealerships didn't offer 0%, they would offer lower prices on cars. And maybe if stores didn't take credit cards they would offer lower prices. But once they decide to do it, there's no reason not to take them up on it.
But they probably wouldn't raise the rates. At 0% APR, they are still making a bet that you will miss a payment and suddenly owe back interest. At interest rates today, not many people have to miss a payment to cover all the others.
I'm sorry you don't find the way the world is working right now to be convincing. But I know people who are ready to pull out their checkbook after negotiating, and then are offered 0% APR. So they took it.
They certainly don't pay more for the car than they do if they paid with cash up front. The price of the car is negotiated, then financing.
Maybe, if the dealerships didn't offer 0%, they would offer lower prices on cars. And maybe if stores didn't take credit cards they would offer lower prices. But once they decide to do it, there's no reason not to take them up on it.
But they probably wouldn't raise the rates. At 0% APR, they are still making a bet that you will miss a payment and suddenly owe back interest. At interest rates today, not many people have to miss a payment to cover all the others.
I'm sorry you don't find the way the world is working right now to be convincing. But I know people who are ready to pull out their checkbook after negotiating, and then are offered 0% APR. So they took it.
It's not that simple really. Higher car prices also drag up second hand car market prices.
Leasing companies can then sell their used rental cars at a higher price, which means they only have to finance the depreciation...which reduces the cost of leasing a car.
It's all swings and roundabouts
Leasing companies can then sell their used rental cars at a higher price, which means they only have to finance the depreciation...which reduces the cost of leasing a car.
It's all swings and roundabouts
Whether they mean it or not, it's sensible. Mortgage amounts correlate to home prices. Consider the most basic idea that if mortgages did not exist, there would be far fewer people who could pay a premium price for a house, and thus the housing market would be forced to cater to the much lower prices and less expensive housing that people could afford without mortgages. I mean, except there's some point where the reality is just untenable, people need to be able to borrow. But the easier it is to borrow, the easier it is for more people to buy more expensive houses and bid up the prices.
ala 2008 jumbo loans
Even more direct is the link between interest rates and house prices. Lower rates push up prices for everyone, you don't get the choice of borrowing X at a better rate to save money every month instead of borrowing X+Y with the same payment if someone else is out there willing to pay X+Y.
It's an interesting dynamic of the more reckless moving the market for everyone and harming not just themselves, but also others, and the potential link to more money being available for lending due to inequality is very interesting indeed, because it suggests a nasty negative cycle.
It's an interesting dynamic of the more reckless moving the market for everyone and harming not just themselves, but also others, and the potential link to more money being available for lending due to inequality is very interesting indeed, because it suggests a nasty negative cycle.
I'm not even sure it's reckless. Especially with rates so low, even a fairly small absolute change in interest rates can have a huge impact on the actual price you theoretically pay for the house, which includes both principal and interest. Paying way too much at 2.75% may actually be less expensive than paying a more reasonable price at 3.25%.
Meaning that, if you've got any concerns that rates might go up in the near future, you're reasonably well incentivized to get into a bidding war in order to close now instead of later.
Meaning that, if you've got any concerns that rates might go up in the near future, you're reasonably well incentivized to get into a bidding war in order to close now instead of later.
college tuitions, mortgages, etc.
Right, financing is the word we’re looking for. We give people credit cards, college loans, car loans, home loans, your phone is a loan, etc. Everything is financed so people don’t really save up to outright purchase something.
It brings us to a fundamental question, and that is, how many years should it really take for someone to buy anything with straight cash. For homes the market believes 15-30 years. For college, it believes something like 2 years to the day you die lol.
Dare I say the people that actually own this stuff before everyone else may believe you should never be able to afford it. That you will buy any number of these things and keep paying until the day you die. Life-as-a-service.
If we ever answer the question of ‘how many years of income’, we’ll have no choice but to come to the conclusion that sellers are operating in the realm of cruelty. That one can charge 30 years of your income and frugality for what they are selling. It’s unreasonable to ask for such a thing, so instead we don’t speak about it and hide the disgusting asking price behind financing.
It brings us to a fundamental question, and that is, how many years should it really take for someone to buy anything with straight cash. For homes the market believes 15-30 years. For college, it believes something like 2 years to the day you die lol.
Dare I say the people that actually own this stuff before everyone else may believe you should never be able to afford it. That you will buy any number of these things and keep paying until the day you die. Life-as-a-service.
If we ever answer the question of ‘how many years of income’, we’ll have no choice but to come to the conclusion that sellers are operating in the realm of cruelty. That one can charge 30 years of your income and frugality for what they are selling. It’s unreasonable to ask for such a thing, so instead we don’t speak about it and hide the disgusting asking price behind financing.
> If we ever answer the question of ‘how many years of income’, we’ll have no choice but to come to the conclusion that sellers are operating in the realm of cruelty. That one can charge 30 years of your income and frugality for what they are selling. It’s unreasonable to ask for such a thing, so instead we don’t speak about it and hide the disgusting asking price behind financing.
This is true, when other regulations prevent people from creating more of the goods. Yes, a seller can sell a box of pasta for $100k... but who will buy it, if you can make your own pasta for cheap, and even sell it to people who want to buy it, but don't want to pay the first sellers house.
In my city, the housing prices are fscking high and rising, but we have literal cornfields and cows in places that are technically the middle of the city. We have right governments, who don't do anything about housing, we have left governments, saying they'll rais the rent taxes (so making rents higher) and build government apartment buildings (=too expensive) for people (=their friends), but noone stops to look at the satellite map and say "hmm.. we could build here, and there, and there...".
Look at San francico for example... there is a huge need for housing, but most of the houses are single family houses... there's no way to pack so many people there in such houses - you need to build huge apartments buildings, but regulation does not allow that, and housing is expensive.
This is true, when other regulations prevent people from creating more of the goods. Yes, a seller can sell a box of pasta for $100k... but who will buy it, if you can make your own pasta for cheap, and even sell it to people who want to buy it, but don't want to pay the first sellers house.
In my city, the housing prices are fscking high and rising, but we have literal cornfields and cows in places that are technically the middle of the city. We have right governments, who don't do anything about housing, we have left governments, saying they'll rais the rent taxes (so making rents higher) and build government apartment buildings (=too expensive) for people (=their friends), but noone stops to look at the satellite map and say "hmm.. we could build here, and there, and there...".
Look at San francico for example... there is a huge need for housing, but most of the houses are single family houses... there's no way to pack so many people there in such houses - you need to build huge apartments buildings, but regulation does not allow that, and housing is expensive.
> Mortgage amounts correlate to home prices.
This is completely true. Another example, in NL, the gov removed “transfer tax” on first-home purchases in 2021. This led to an increase in housing prices, as the “savings” just helped people bid higher on houses.
The world and its economy are absurd.
This is completely true. Another example, in NL, the gov removed “transfer tax” on first-home purchases in 2021. This led to an increase in housing prices, as the “savings” just helped people bid higher on houses.
The world and its economy are absurd.
Housing markets just really suck. They tend to settle just so as to be too expensive for many and extract tons of value from the poor.
That's how markets work, no? The goal of pricing a scarce good is to put it at what people are willing to pay, which for something you need to live, is all they are able to pay. The system is working as designed.
Yeah for something like healthcare, people are desperate to live and not die, so the healthcare system in a market economy easily expands to the point where people are working their whole lives to the point where the healthcare system can ultimately confiscate all of that value back. You lose your job, your insurance, you draw down all your savings and then you get some level of poverty support. Meanwhile the insurance system itself tries to expand to grab all your marginal earnings increases before you actually get sick. Since the demand is completely inelastic and insensitive to pricing increases due to most people wanting healthcare to avoid their own death, it just expands.
People forget that demand isn't the only thing that decides prices. The other player is supply, and the problem with healthcare is quite clearly supply. I hate to go all free market evangelist on HN, but the American healthcare economy is about the furthest thing from a market economy you'll see in the US and saying things like
>the healthcare system in a market economy easily expands to the point where people are working their whole lives to the point where the healthcare system can ultimately confiscate all of that value back
is ludicrous. Healthcare systems in market economies expand to fill a respectable but manageable share of people's budgets. You can tell by looking at literally any other country with a market economy (most of them) and checking what they charge for an ambulance.
>the healthcare system in a market economy easily expands to the point where people are working their whole lives to the point where the healthcare system can ultimately confiscate all of that value back
is ludicrous. Healthcare systems in market economies expand to fill a respectable but manageable share of people's budgets. You can tell by looking at literally any other country with a market economy (most of them) and checking what they charge for an ambulance.
While I agree with the gist of your point, the free market approach to health care doesn't account for consumers' short-term thinking. The market doesn't operate well on the scale of decades, it only responds to current activity.
My point is: given a population of health-conscious, long-term thinking consumers, a free market to serve their needs is likely to work out pretty well… except for potentially getting flooded by long-term promises that aren't actually held up over the long-term. But if the population isn't focused on health and is short-term focused, we'd see market failure here, and yet the population and economy overall will still face all the costs of people not choosing to get the preventative care they need and thus spreading disease or other social costs long-term.
My point is: given a population of health-conscious, long-term thinking consumers, a free market to serve their needs is likely to work out pretty well… except for potentially getting flooded by long-term promises that aren't actually held up over the long-term. But if the population isn't focused on health and is short-term focused, we'd see market failure here, and yet the population and economy overall will still face all the costs of people not choosing to get the preventative care they need and thus spreading disease or other social costs long-term.
I agree with you, and am actually for certain state interventions to correct for this (like mandated health insurance that actually works as insurance and not the perverse chimera it is now), but even a naive free market would be so much better than what the US has now that I can't bring myself to care so much about the second-order corrections.
Oh sure, I will readily accept market failure as an improvement over regulations that are actively corrupt or otherwise specifically working against the public interest.
Everywhere else has government cost controls on healthcare on the insurer/payer side.
The market working would be supply matching the demand to keep prices relatively steady. But supply is artificially restricted leading to stupid price increases.
The GP alluded to housing being a scarce good. Yes, you can increase housing density, but you eventually hit a wall where infrastructure is limiting and expensive to build meaning that you can't drop the price of housing. At which point the only solution is to build more cities or enter a death spiral.
It's why China had to start building cities, eventually density stops being economically feasible either.
It's why China had to start building cities, eventually density stops being economically feasible either.
Sure, but the wall is not a million bucks for a 3/2 home.
For now it's not, but even when supply meets demand housing prices tend to increase, so it could very well happen in not too long.
That's a bit strange to say. Supply is restricted largely by capital required to compete. Because that results in more profits, it's the default tendency of capitalism/"free market" policies. So in a sense, it's naturally restricted, not artificially.
Supply is also naturally restricted because there is only so much land in an area. Especially when we are talking about people interested in their own dwelling/home where building a condo just means they look elsewhere. People forget this basic fact a lot when talking about housing.
Luckily humanity learned to build skyscrapers eons ago. You're forgetting about the many people who would easily shift to condo housing if it was 2x cheaper, but aren't because it's marginally cheaper than a SFH, and they don't want to put 3x their net worth into a condo that will probably end up financially worse than a SFH. So you still have a huge population that would live in condo's if it was more affordable. And housing pricing is all about the margins of the market, so you fix that imbalance and you make the housing market a whole lot more healthy.
Skyscrapers get expensive quick and can rapidly max out the infrastructure.
It's not a good system, so who cares if it is "as designed"?
If pushing the "confirm order" button on your ecommerce site launches a nuclear-tipped ICBM, the fact that it's "to spec" doesn't really mean much.
If pushing the "confirm order" button on your ecommerce site launches a nuclear-tipped ICBM, the fact that it's "to spec" doesn't really mean much.
So the real question is, should we design a different system?
as far as it relates to property and home issues, I think the iteration (not revolution really) we need is the Strong Towns ideas at StrongTowns.org which is really a mix that is very far from any typical right-left conservative-liberal sort of thing. It's relatively opposed to top-down but it's not at all the dogmatic libertarian free market either.
Hmm, this would be pretty easy to test I'd think. You should see a definite knee in US property prices around $612k ($510k conforming loan maximum + 20% standard down payment). Above that price, loans will be harder to obtain and command higher interest rates.
Does anyone have a good source of this kind of data?
Does anyone have a good source of this kind of data?
The conforming loan max is different in different areas, so you'd have to look at this very regionally. 20% is hardly universal too.
When I looked, non-conforming loans had slightly higher rates, but in a sub-3% world... it wasn't a huge difference. Sometimes down payment affected the rate, sometimes it didn't. Lenders seemed to have a lot of knobs to tweak on the backend to make it work if they wanted to make the loan for clients who were shopping around.
When I looked, non-conforming loans had slightly higher rates, but in a sub-3% world... it wasn't a huge difference. Sometimes down payment affected the rate, sometimes it didn't. Lenders seemed to have a lot of knobs to tweak on the backend to make it work if they wanted to make the loan for clients who were shopping around.
Except housing prices aren't what matter, monthly payments are. If interest rates are lower but payments are the same, the only people that benefit are existing homeowners, but new home buyers aren't harmed since monthly payments stay the same. The banks and MBS investors are the ones who get screwed since they make super low rates.
In some ways lower interest rates is actually better since higher home values mean you can spend more on amenities like high end kitchen and bathroom as a builder.
The issue comes when you start looking at sub-prime debtors like students. If you have a 300 bps risk premium for being an unreliable borrower but the interest rate for reliable creditors is only 2%, your risk premium is 150%, but if the reliable borrower rate was 6% then your risk premium is only 50%. Add to this the fact that refinancing student loans (issued by the government) causes them to lose benefits like the 0% interest pause we have right now. That means the government intervention has caused a market distortion: you can't fungibly exchange your loan for a refinanced one at the market rate but instead are stuck with the 5-8% rates from 5 years ago.
Government intervention also has other impacts: since you can't discharge student loans in bankruptcy, there's no incentive for universities to make students succeed or to discriminate admittance/cost by major (proxy for future earning power). That means we have a huge number of people stuck with high interest loans they can't discharge or refinance and useless degrees in majors that have 0 value to society. If you changed this to allow students to discharge student debt in bankruptcy and forced universities to assume the risk instead of the government, university incentives would be aligned with student incentives.
In some ways lower interest rates is actually better since higher home values mean you can spend more on amenities like high end kitchen and bathroom as a builder.
The issue comes when you start looking at sub-prime debtors like students. If you have a 300 bps risk premium for being an unreliable borrower but the interest rate for reliable creditors is only 2%, your risk premium is 150%, but if the reliable borrower rate was 6% then your risk premium is only 50%. Add to this the fact that refinancing student loans (issued by the government) causes them to lose benefits like the 0% interest pause we have right now. That means the government intervention has caused a market distortion: you can't fungibly exchange your loan for a refinanced one at the market rate but instead are stuck with the 5-8% rates from 5 years ago.
Government intervention also has other impacts: since you can't discharge student loans in bankruptcy, there's no incentive for universities to make students succeed or to discriminate admittance/cost by major (proxy for future earning power). That means we have a huge number of people stuck with high interest loans they can't discharge or refinance and useless degrees in majors that have 0 value to society. If you changed this to allow students to discharge student debt in bankruptcy and forced universities to assume the risk instead of the government, university incentives would be aligned with student incentives.
I can’t think of a single degree that has zero value to society.
At scale, I can think of several that have negative value. But generally? No, every degree has value. Some are abstract and hard to quantify in ways that economists can track but that doesn’t mean the world wouldn’t be worse without them.
At scale, I can think of several that have negative value. But generally? No, every degree has value. Some are abstract and hard to quantify in ways that economists can track but that doesn’t mean the world wouldn’t be worse without them.
Zero value, negative value, for the purposes of determining whether we should be subsidizing college these are the same.
I think it's very unlikely most humanities majors are going on to produce culture defining works. Perhaps in the Ivy Leagues, but that's also where students are primarily wealthy and already capable of paying for college and therefore not subsidized by the state. I went to a highly ranked public school and most humanities majors ended up working either in low paying clerical work (data entry, event planning, on-site property management, etc.) or in food service (i.e. barista). These are jobs where you don't need a college education (or maybe just an associate's degree) and certainly not a four year degree in classics.
IIRC most European countries don't have anywhere near the size of humanities programs that the US does, most students that can't make it into a good humanities program or can't make it into STEM go to trade schools. Europe doesn't have quite the number of private schools offering these useless degrees to people who couldn't get accepted into more prestigious institutions.
I think it's very unlikely most humanities majors are going on to produce culture defining works. Perhaps in the Ivy Leagues, but that's also where students are primarily wealthy and already capable of paying for college and therefore not subsidized by the state. I went to a highly ranked public school and most humanities majors ended up working either in low paying clerical work (data entry, event planning, on-site property management, etc.) or in food service (i.e. barista). These are jobs where you don't need a college education (or maybe just an associate's degree) and certainly not a four year degree in classics.
IIRC most European countries don't have anywhere near the size of humanities programs that the US does, most students that can't make it into a good humanities program or can't make it into STEM go to trade schools. Europe doesn't have quite the number of private schools offering these useless degrees to people who couldn't get accepted into more prestigious institutions.
Well no, people with capital would be able to buy the houses and then rent it out, extracting the maximum amount they can.
As wages go up, the money available for people to pay for housing goes up.
If a given city employs people and pays enough that 1 person earning an typical wage can afford $1k a month rent, then that's what rent will be. It won't be lower (because landlords will charge the most they can), but it won't be higher (people will move to another city - perhaps one with lower wages, but lower rent).
When we switched to a society where it was normal to have 2 incomes in a given house, the money available to pay for housing increased dramatically (towards $2k, but for families you'd have to remove things like childcare costs which would normally have been done by 1 person), and thus rents increase to the point where supply/demand returns to an equilibrium.
Now aside from rent, you could also buy. A house costs whatever the maintenence is, plus the interest cost of the mortgage (there's also the capital repayment part and the likelihood of the house increasing in value in the future)
Rents are also capped by this - if the cost of buying (including the maintenence) goes below renting, then people will buy. That means house prices are constrained by rental - if the cost of buying/owning house is too much, people will rent. Ultimately they to can always move out of the city and leave their job.
When interest rates went down, people could spent more on buying a house, which meant prices went up.
Imagine a couple that have a budget for $2k a month for housing. If interest rates were to double, mortgage costs would increase. That wouldn't change rents (which would still be $2k), but instead of a house costing say $800k (2k/month allowing 800k loan at 3% interest), instead people could only borrow say 400k. That means that houses go down to 400k, but still cost the same per month.
This is great for people with spare cash, as they can buy up those cheaper properties without having to pay the interest, and still get their $2k/month rent coming in.
It's no change for people who want to buy for $2k/month, that's what they can afford, and it's going to be roughly the same as what it would cost to rent.
It's terrible for people who want to sell and repay their equity, as the house price has suddenly halved. They bought it with an 800k loan, have repaid 10% of that, and owe 720k, now they can only sell for 400k. So they rent it out instead and rent somewhere else.
As wages go up, the money available for people to pay for housing goes up.
If a given city employs people and pays enough that 1 person earning an typical wage can afford $1k a month rent, then that's what rent will be. It won't be lower (because landlords will charge the most they can), but it won't be higher (people will move to another city - perhaps one with lower wages, but lower rent).
When we switched to a society where it was normal to have 2 incomes in a given house, the money available to pay for housing increased dramatically (towards $2k, but for families you'd have to remove things like childcare costs which would normally have been done by 1 person), and thus rents increase to the point where supply/demand returns to an equilibrium.
Now aside from rent, you could also buy. A house costs whatever the maintenence is, plus the interest cost of the mortgage (there's also the capital repayment part and the likelihood of the house increasing in value in the future)
Rents are also capped by this - if the cost of buying (including the maintenence) goes below renting, then people will buy. That means house prices are constrained by rental - if the cost of buying/owning house is too much, people will rent. Ultimately they to can always move out of the city and leave their job.
When interest rates went down, people could spent more on buying a house, which meant prices went up.
Imagine a couple that have a budget for $2k a month for housing. If interest rates were to double, mortgage costs would increase. That wouldn't change rents (which would still be $2k), but instead of a house costing say $800k (2k/month allowing 800k loan at 3% interest), instead people could only borrow say 400k. That means that houses go down to 400k, but still cost the same per month.
This is great for people with spare cash, as they can buy up those cheaper properties without having to pay the interest, and still get their $2k/month rent coming in.
It's no change for people who want to buy for $2k/month, that's what they can afford, and it's going to be roughly the same as what it would cost to rent.
It's terrible for people who want to sell and repay their equity, as the house price has suddenly halved. They bought it with an 800k loan, have repaid 10% of that, and owe 720k, now they can only sell for 400k. So they rent it out instead and rent somewhere else.
It cuts both ways - if it wasn’t for FHA and very easy borrowing for first time home buyers, many many more people would still be renting and likely not building at least some wealth/equity.
By constraining the supply of loans, first and foremost you’d be cutting out those who need it most. Unfortunately, that’s how risk markets work - the riskiest (also usually the poorest) get cut first.
The interest rate argument isn’t actually very grounded in fact - in order to save from refinancing, the rates have to have declined from where they were before. If rates stay flat, there is no benefits in refi - whether they stay flat at 5%, 3% or 10%, as long as the rates stay flat. However, borrowing at a lower rate is better because you end up putting more into the equity. If you borrow at zero percent, everything you pay in goes to reduce the principle and so long as the property doesn’t decline, you are building wealth.
This is why arguing to reduce the loan supply to me is very counterproductive. What we need is better education and fewer predatory lending practices. Things like payday loans, etc, are currently predatory. Those could be reformed to serve the purpose they were originally intended for (emergency money), but until that happens, things like that create the actual problem, not the loan supply itself.
By constraining the supply of loans, first and foremost you’d be cutting out those who need it most. Unfortunately, that’s how risk markets work - the riskiest (also usually the poorest) get cut first.
The interest rate argument isn’t actually very grounded in fact - in order to save from refinancing, the rates have to have declined from where they were before. If rates stay flat, there is no benefits in refi - whether they stay flat at 5%, 3% or 10%, as long as the rates stay flat. However, borrowing at a lower rate is better because you end up putting more into the equity. If you borrow at zero percent, everything you pay in goes to reduce the principle and so long as the property doesn’t decline, you are building wealth.
This is why arguing to reduce the loan supply to me is very counterproductive. What we need is better education and fewer predatory lending practices. Things like payday loans, etc, are currently predatory. Those could be reformed to serve the purpose they were originally intended for (emergency money), but until that happens, things like that create the actual problem, not the loan supply itself.
> many many more people would still be renting and likely not building at least some wealth/equity.
This seems true intuitively, but if you think deeper, where does that accumulated wealth/equity come from? They are paid by future generations of regular people, or generational wealth transfer as some call it.
This seems true intuitively, but if you think deeper, where does that accumulated wealth/equity come from? They are paid by future generations of regular people, or generational wealth transfer as some call it.
And if you pay rent, where does that go? Especially when renting from a large company?
Better more folks accumulate at least something.
Better more folks accumulate at least something.
The market is not a zero sum game. If mortgages were illegal, the same houses would just be more expensive overall, and effectively most would be living in smaller or worse homes as a result.
A loan in a fractional reserve system is inflationary because it increases the money supply.
By that logic the Fed's low rates is what buried the middle class in debt by a much larger degree than corporate savings.
Yes, this is the right answer
Banks don't need funding to supply mortgages. Or, more accurately, they need only 10% funding and that has never been a bottleneck before. It isn't the reason mortgage prices are rising.
There is no bottleneck, the opposite is true! Banks need only 10% funding, yes, which means for a one million deposit they can create 9 million in debt, thereby reducing the cost of money, thereby inflating asset prices.
Your version actually makes a better argument for causality than the original one (which appears to be essentially bank and government debt may be less efficient allocation of capital than other theoretical uses the corporations could have put the money to but chose not to because they couldn't find any more efficient uses for it). But it's still not quite right: banks can and always do lend much more than is deposited with them, and the main thing that reduces their lending is changes in interest rates, which is a policy decision taken by the Fed (whose primary driver is actually stopping most prices rising too fast). If the Fed raised the interest rate tomorrow, the rich would actually expect to earn more from their money being loaned to consumers, but the demand for mortgages and personal loans would be lower. As the supply of money available for banks to lend is largely not determined by the rich (unlike a Gold Standard type system with fixed money supply), their preference for putting money in banks is like pushing on a string when it comes to consumers loaning more money.
It's almost the other way round: corporations raking in massive profits and having the option to keep funds in banks rather than reinvest in the corporation is a symptom of not much competition. That lack of competition does push prices for poor people up and wages down and that may be one of the reasons why they need to borrow more.
(Housing market policy obviously also plays a massive role in the size of mortgage debt too.)
It's almost the other way round: corporations raking in massive profits and having the option to keep funds in banks rather than reinvest in the corporation is a symptom of not much competition. That lack of competition does push prices for poor people up and wages down and that may be one of the reasons why they need to borrow more.
(Housing market policy obviously also plays a massive role in the size of mortgage debt too.)
It seems to me that the original is more along the lines of "bank and government debt may be less efficient allocation of capital than giving it to the people who will end up spending it anyway". Because it is. Debt is almost always less efficient than using cash - especially if you're not rich.
Yes and no. Debt is obviously less beneficial than cash to the person who has to repay, and cash carries an opportunity cost rather than a direct one with repayment timescales, but newly created money is more likely to be allocated efficiently with respect to economic growth when handed to those who expect to be able to repay. You can plausibly argue it's [Kaldor Hicks] efficient as well as more equitable to take money off the rich and give it to ordinary consumers if the rich aren't reinvesting in businesses because they don't see people having the funds to demand stuff in future (or if they're intentionally stifling their part of the economy or plain unimaginative) but the article seems to stop short of committing to that. It suggests government debt (much of it as a result of handouts to the needy) is part of the problem and appears lukewarm about redistribution.
The primary driver of the fed is stopping prices from increasing too fast? The fed does talk about inflation, but unless my perception is wrong, they talk about employment more.
I think you're interpretation is correct and GP is wrong to think the "primary driver of the Fed is stopping prices from increasing too fast."
Fed has recently repeatedly stated it's goal is to drive down unemployment and is willing to let inflation run hot to achieve that. It's always a balancing act if one of them is worse than the other, they will focus on that. However it looks like when both of them are bad, they would rather focus on unemployment by letting inflation hit harder.
The Fed has a formal target of 2% inflation (the major change recently was to allow it to be 2% on average, over time rather than 2% period)
It doesn't have any employment target, although obviously extremes of unemployment is something it pays some attention to when deciding whether it's OK to miss its primary target or not.
It doesn't have any employment target, although obviously extremes of unemployment is something it pays some attention to when deciding whether it's OK to miss its primary target or not.
There's a mistake in that comment. The opposite is true. Central banks primary driver is to stop CPI prices from decreasing, which happens naturally because economic productivity increases with technological progress, making it easier and cheaper to produce goods and services.
Money is created to revert this development so that CPI prices increase at the rate of 2% per year. Naturally, life would get easier because of technology, but instead life is made harder and harder to incentivize economic growth and environmental destruction, and keeping people in jobs that are not necessary or keeping work days longer than necessary (hamster-wheel economy).
It's important to note that inflation is relative to CPI prices, because CPI prices will naturally decrease but prices of scarce assets like real estate will relatively increase because they're more limited by space, time and energy. On the other hand, digital goods and services are highly deflationary, i.e. digital consumption is getting cheaper. So, there's digital deflation, 2% CPI inflation, 10% (or more) asset inflation.
Money is created to revert this development so that CPI prices increase at the rate of 2% per year. Naturally, life would get easier because of technology, but instead life is made harder and harder to incentivize economic growth and environmental destruction, and keeping people in jobs that are not necessary or keeping work days longer than necessary (hamster-wheel economy).
It's important to note that inflation is relative to CPI prices, because CPI prices will naturally decrease but prices of scarce assets like real estate will relatively increase because they're more limited by space, time and energy. On the other hand, digital goods and services are highly deflationary, i.e. digital consumption is getting cheaper. So, there's digital deflation, 2% CPI inflation, 10% (or more) asset inflation.
Economic productivity increases, but so does the amount of units of stuff consumers want, the number of consumers demanding stuff (and the number of retired consumers) and there are also real resource constraints, especially affecting energy prices.
The bank's target is symmetric, but inflation was on average much higher in the decades before central banks' target became CPI inflation
The bank's target is symmetric, but inflation was on average much higher in the decades before central banks' target became CPI inflation
Some goods have gotten cheaper as they've had more capital invested in their production processes, but many goods do not. Automobiles are a classic example. Ask your grand parents how much they paid for their first car. Yes, the goods are different, and cars today are better, but it's not clear that we shouldn't still compare the socially equivalent car of today with the one of 50 years ago.
A steady, low inflation rate is necessary for a healthy economy. Otherwise you'd get a Bitcoin situation where everyone is busy HODLing and never spending.
A steady, low inflation rate is necessary for a healthy economy. Otherwise you'd get a Bitcoin situation where everyone is busy HODLing and never spending.
Saving is healthy for economy. Inflation is slavery. Inflation moves capital from the productive to the unproductive, from the efficient to the inefficient.
Almost the reverse is true. Inflation increases the opportunity cost of choosing not to use one's claim on future resources productively, and incentivises investment in production.
Saving is healthy for the economy when the savings are invested in production. It is not healthy for the economy when savings are hoarded for risk-free gains at the expense of investment-starved productive entities.
Saving is healthy for the economy when the savings are invested in production. It is not healthy for the economy when savings are hoarded for risk-free gains at the expense of investment-starved productive entities.
False. People are already storing their wealth in gold, art, collector items, land and real estate without looking for any profits. They're just defending from monetary inflation. These assets resemble hard money in their properties, because they're scarce and can't be created from thin air. You can't stop people from parking their wealth in non-productive hard assets.
The problem is that money is created from thin air and it's used to buy these hard assets. It's not used for productive investments.
Inflation is stealing and it's not healthy for economy.
The problem is that money is created from thin air and it's used to buy these hard assets. It's not used for productive investments.
Inflation is stealing and it's not healthy for economy.
Inflation is no more stealing than the dynamics of supply and demand are, which is to say, only as much as society permits and ostensibly finds desirable.
True, if we're in a hard money standard, and there's natural inflation. In a hard money standard inflation and deflation would be caused by supply and demand fluctuations of real economy.
Monetary inflation, i.e forced inflation by creating money from thin air, is stealing. In hard money standard, there would be a natural price discovery for interest rates, based on supply and demand of money. It's obvious that if someone can basically counterfeit money, it is stealing.
In Bitcoin standard, there would be no hidden information in money itself. Now, central bank policies have become the information that moves markets. I.e. we are not in a free market economy.
Monetary inflation, i.e forced inflation by creating money from thin air, is stealing. In hard money standard, there would be a natural price discovery for interest rates, based on supply and demand of money. It's obvious that if someone can basically counterfeit money, it is stealing.
In Bitcoin standard, there would be no hidden information in money itself. Now, central bank policies have become the information that moves markets. I.e. we are not in a free market economy.
> forced inflation by creating money from thin air, is stealing
That's just your ethical interpretation. Society in aggregate defines what is and isn't stealing, and at the moment we've deemed monetary inflation to be ethically acceptable, and even desirable.
In a way, the use of monetary inflation to transfer wealth could be seen as the realization of a sense that one must continually put one's wealth to productive use in order to deserve it. That means the squirreling away of wealth is stealing. Owning wealth is having the right to allocate society's resources. Clearly, society thinks that right atrophies if not exercised productively.
> Bitcoin
Ah, I figured there was some boosterism about sneak its way into the conversation.
That's just your ethical interpretation. Society in aggregate defines what is and isn't stealing, and at the moment we've deemed monetary inflation to be ethically acceptable, and even desirable.
In a way, the use of monetary inflation to transfer wealth could be seen as the realization of a sense that one must continually put one's wealth to productive use in order to deserve it. That means the squirreling away of wealth is stealing. Owning wealth is having the right to allocate society's resources. Clearly, society thinks that right atrophies if not exercised productively.
> Bitcoin
Ah, I figured there was some boosterism about sneak its way into the conversation.
Creating money is wrong because it benefits those who have the power to create money vs. those who can't. It's only ethically acceptable because people don't understand it, or don't have any choice.
"One must continually put one's wealth to productive use". It's not something that should be forced on people. One should have the ability to save for a bad day and hedge against volatility in the economy. One should also have the ability to spend less in order to save the environment. You can buy gold etc. but then you miss out on the currency aspect, i.e you can't spend it easily.
And yes, obviously I'm talking about Bitcoin because it's the hardest asset ever created, and will replace fiat currencies whether you like it or not. I'm not talking about gold standard, because gold failed as money already. There aren't other options as far as I know.
"One must continually put one's wealth to productive use". It's not something that should be forced on people. One should have the ability to save for a bad day and hedge against volatility in the economy. One should also have the ability to spend less in order to save the environment. You can buy gold etc. but then you miss out on the currency aspect, i.e you can't spend it easily.
And yes, obviously I'm talking about Bitcoin because it's the hardest asset ever created, and will replace fiat currencies whether you like it or not. I'm not talking about gold standard, because gold failed as money already. There aren't other options as far as I know.
True. I would 100% agree that the fed's priorities, (north star: maintain 'stability' for some definition of stability), in order of importance are:
KPI 1. Keep prices from decreasing (screw the poor, put the middle class on a hamster wheel so they don't get too powerful)
KPI 2. Keep employment up (if you're working you're too busy to revolt)
KPI 3. Keep prices from increasing too fast (or else people will have nothing to lose and will riot)
KPI 1. Keep prices from decreasing (screw the poor, put the middle class on a hamster wheel so they don't get too powerful)
KPI 2. Keep employment up (if you're working you're too busy to revolt)
KPI 3. Keep prices from increasing too fast (or else people will have nothing to lose and will riot)
I can't tell if you're exaggerating for effect or if you really believe the parenthetical comments, but the people working at the fed are fairly regular people and don't think that way.
The people working at the fed are not regular people. I know at least two. Call me when someone at the fed has driven for Uber or Lyft for two years to understand markets from a "regular person" perspective, or moonlights a second job as a server at a restaurant to understand how the disparity in tax treatment for tipped jobs affects economic choices of the exhausted wage-earner.
The point of the parentheticals is not to imply this is what those a the fed believe, but to highlight how the single north star "optimize for social stability" has encoded within itself dangerous biases. Whether or not they believe those things, that is what they are working towards.
The point of the parentheticals is not to imply this is what those a the fed believe, but to highlight how the single north star "optimize for social stability" has encoded within itself dangerous biases. Whether or not they believe those things, that is what they are working towards.
KPI 4. Allow wealthy people, institutions and governments to get cheap money without real cost of capital, stealing away all wealth from the common people.
If inflation goes up as a result of low inflation rates, debtors benefit. Which is why all the bankers are complaining about the possibility.
That's what I meant. Common people and those with cash reserves are creditors who lose their money. Wealthy debtors buy assets with the cheap loan money, and are guaranteed to get richer without risk. Because of this, all valuable assets are moving to few hands.
"Common" people in the USA don't have cash reserves. They are debtors, on average.
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Perhaps it is time to go back to the Gold standard. No more fractional reserve banking, Bretton Woods anyone?
How does the gold standard in any way prevent fractional reserve banking, since fractional reserve banking predates moving off the gold standard?
Yup. Same reason college costs are obscenely high. Everyone’s guaranteed a loan to cover whatever amount of educational expenses they have, so colleges can charge however much money they want.
Public institutions aren't free to charge whatever they want, at least in my state. My college needs permission to raise tuition. While state funding per student has declined in my state the legislature has mandated that tuition be lowered or held steady in recent years.
> That's pretty interesting
It's also nonsense. The giant debt is coming from government borrow and spend of trillions and trillions of dollars, with more trillions being proposed.
The difference between corporate debt and government debt is corporate debt is backed by assets, which is not inflationary. Government debt is backed by nothing, hence it is inflationary.
It's also nonsense. The giant debt is coming from government borrow and spend of trillions and trillions of dollars, with more trillions being proposed.
The difference between corporate debt and government debt is corporate debt is backed by assets, which is not inflationary. Government debt is backed by nothing, hence it is inflationary.
> The difference between corporate debt and government debt is corporate debt is backed by assets, which is not inflationary.
If this were true corporations would never become insolvent. The role of CDOs and CDSs in the 2008 crisis made it abundantly clear how corporate debt can be inflationary. But we knew that beforehand from previous crises in the 19th and early 20th century when unwinding corporate debt and restoring liquidity was handled (if at all) almost entirely in the smokey parlors of the private sector by titans like J. P. Morgan. See, e.g., https://en.wikipedia.org/wiki/Panic_of_1907 More generally, see Lords of Finance (https://en.wikipedia.org/wiki/Lords_of_Finance), an historical account of early 20th century international banking which swept up numerous history and economics awards. (It was coincidence that it was published amidst the 2008 crisis. IIRC nothing in the book mentions it except possibly a foreword.)
If this were true corporations would never become insolvent. The role of CDOs and CDSs in the 2008 crisis made it abundantly clear how corporate debt can be inflationary. But we knew that beforehand from previous crises in the 19th and early 20th century when unwinding corporate debt and restoring liquidity was handled (if at all) almost entirely in the smokey parlors of the private sector by titans like J. P. Morgan. See, e.g., https://en.wikipedia.org/wiki/Panic_of_1907 More generally, see Lords of Finance (https://en.wikipedia.org/wiki/Lords_of_Finance), an historical account of early 20th century international banking which swept up numerous history and economics awards. (It was coincidence that it was published amidst the 2008 crisis. IIRC nothing in the book mentions it except possibly a foreword.)
> If this were true corporations would never become insolvent.
Banks call that "risk". They still demand collateral equivalent to the value of the loan. The more the "risk" of the collateral being worth less than the value of the loan, the correspondingly less they'll loan.
The Fed, on the other hand, offers no collateral at all.
Also, there was zero net inflation in the US from 1800 to 1914. Endemic inflation started then, because that's when the US decided to start borrowing money without collateral (aka fiat money).
Banks call that "risk". They still demand collateral equivalent to the value of the loan. The more the "risk" of the collateral being worth less than the value of the loan, the correspondingly less they'll loan.
The Fed, on the other hand, offers no collateral at all.
Also, there was zero net inflation in the US from 1800 to 1914. Endemic inflation started then, because that's when the US decided to start borrowing money without collateral (aka fiat money).
The collateral the Federal government offers is the U.S. economy, which it can tax, and national assets, which it can lease or sell. From the perspective of international global finance, the U.S. Federal government is just another counterparty, albeit a very large one.
The fact that the government prints its own currency doesn't change things that much in the abstract. A dollar note is just that--a promissory note, a type of negotiable instrument like a corporate bond or personal check. The U.S. government can print more notes, but a corporation can print more bonds or a shopper sign a bunch of checks. The value isn't what's on the face, but what people will give you in exchange for it. In the case of the U.S., foreign parties are still eager, perhaps too eager, to exchange automobiles and semiconductors for U.S. notes. Ditto for U.S. bonds.
The fact that the government prints its own currency doesn't change things that much in the abstract. A dollar note is just that--a promissory note, a type of negotiable instrument like a corporate bond or personal check. The U.S. government can print more notes, but a corporation can print more bonds or a shopper sign a bunch of checks. The value isn't what's on the face, but what people will give you in exchange for it. In the case of the U.S., foreign parties are still eager, perhaps too eager, to exchange automobiles and semiconductors for U.S. notes. Ditto for U.S. bonds.
It's worse than nonsense. "Savings considered harmful" — is that the proposition? It's economically destructive. It's propaganda for this Modern Monetary Theory idea that encourages basically printing money, ad infinitum.
This isn't really true.
Governments can print money. And they can raise taxes (immediately upping their revenue). Those are their "assets". Much more reliable ones than the average business.
Now look at most businesses. What assets do they have? Second hand manufacturing equipment at best, basically scrap. And that's the companies that have at least some. What assets does Facebook have? A brand name is the main one, you can't resell that really... Lots of western companies are basically hollow.
I can't comment on the core point of the article, I'm just saying you're a lot safer with government debt than corporate...
Governments can print money. And they can raise taxes (immediately upping their revenue). Those are their "assets". Much more reliable ones than the average business.
Now look at most businesses. What assets do they have? Second hand manufacturing equipment at best, basically scrap. And that's the companies that have at least some. What assets does Facebook have? A brand name is the main one, you can't resell that really... Lots of western companies are basically hollow.
I can't comment on the core point of the article, I'm just saying you're a lot safer with government debt than corporate...
What's reliable is you'll get paid back with inflated dollars, dollars that the government borrowed again. And the national debt grows and grows ever larger...
BTW, personally I don't invest in government bonds. They're a loser of an investment.
Always remember that Roosevelt defaulted on the gold bonds.
BTW, personally I don't invest in government bonds. They're a loser of an investment.
Always remember that Roosevelt defaulted on the gold bonds.
I didn't even know gold bonds were a thing. I guess they're the ultimate inflation proof bond...
> Government debt is backed by nothing, hence it is inflationary.
Which is strange. You would expect if that was the case people to charge the government non-trivial amounts of interest. And yet, the interest rate the government spends on interest for a 20-year loan is 2.1% APR.
Which is strange. You would expect if that was the case people to charge the government non-trivial amounts of interest. And yet, the interest rate the government spends on interest for a 20-year loan is 2.1% APR.
Yes that's basically how money is created. Money is then destroyed when the debt is repaid. Great video resource about money narrated by Ray Dalio: https://youtu.be/PHe0bXAIuk0
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"Ideally, all those savings would be channeled into productive investments such as research and development, or practical equipment, or new roads, or even new
yachts--investments that would promote growth in the economy."
It's important to keep in mind that even when that money is spent, there's no guarantee it'll be spent domestically.
Just as an example, Jeff Bezos bought his $500 million superyacht from Oceanco, a Dutch yachtmaker.
Increasingly, the ultra-rich are, like many of the companies they control, multinational.
It's important to keep in mind that even when that money is spent, there's no guarantee it'll be spent domestically.
Just as an example, Jeff Bezos bought his $500 million superyacht from Oceanco, a Dutch yachtmaker.
Increasingly, the ultra-rich are, like many of the companies they control, multinational.
As vile as the robber barons were, at least they were bounded by the confines of their environment to care at least a bit about their countrymen and have some patriotic tendencies.
Do we count Africans or the native American tribes?.
We have made some progress.
We have made some progress.
Modern day robber barons aren’t helping those groups either.
I think compared to the Gilded Age they're doing a 1000x better job. Even if it's because they were dragged into doing it. It's easy to point out shortcomings, but don't ignore progress.
Think of America as a giant venture-funded experiment in equality. Even if we're 200 years in without a showing a profit, we've had steady revenue growth and loyal customers. Profits will come eventually.
Think of America as a giant venture-funded experiment in equality. Even if we're 200 years in without a showing a profit, we've had steady revenue growth and loyal customers. Profits will come eventually.
How are they doing a better job?
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Yeah, but you can't really look at economies from that protectionist viewpoint. The US primarily exports services like software, consulting, tourism, etc. that rely on strong foreign economies.
So if that Dutch shipbuilder needs AUTOCAD and Slack to function and then the employees vacation in Miami, the US still benefits despite the final product being produced elsewhere.
So if that Dutch shipbuilder needs AUTOCAD and Slack to function and then the employees vacation in Miami, the US still benefits despite the final product being produced elsewhere.
What fraction of the US$500M do you think those benefits to the US might add up to?
According to the Census Bureau, the trade balance between the US <==> Netherlands is +$17B in the US's favor [0]. This seems to support OP's point.
[0] https://www.census.gov/foreign-trade/balance/c4210.html
[0] https://www.census.gov/foreign-trade/balance/c4210.html
Do you believe that this trade imbalance makes it likely that a significant part of the US$500M Bezos reportedly spent on the boat will return to the US?
The trade numbers mean that the Netherlands spent about 4.5% of its GDP (US$1T) in trade with the US. That would imply that if the boat fits into those patterns, about 22M of the 500M cost might come back to the USA.
One possibility is that despite not having the boatyards in the US that could build such a vessel, the majority or even just a substantial fraction of the components that are used for the boat originate in the USA, and that in reality significantly more of the US$500m will flow back to the USA.
I don't know enough about the construction of contemporary mega-yachts to know if that's likely or not.
The trade numbers mean that the Netherlands spent about 4.5% of its GDP (US$1T) in trade with the US. That would imply that if the boat fits into those patterns, about 22M of the 500M cost might come back to the USA.
One possibility is that despite not having the boatyards in the US that could build such a vessel, the majority or even just a substantial fraction of the components that are used for the boat originate in the USA, and that in reality significantly more of the US$500m will flow back to the USA.
I don't know enough about the construction of contemporary mega-yachts to know if that's likely or not.
I'm just saying that, sure, that $500mn purchase doesn't exclusively benefit Americans, but if you want to force all Americans to 'Buy American,' don't be surprised when your employer's earnings/valuation go down because foreign customers stop buying their products as their economies shrink.
If your argument is that we should 'Buy American' to subsidize low-skill/low-income workers while limiting the earning potential of high-skill/high-income workers, then I dig it, but honestly the easier/better solution is a more progressive tax regime/welfare state.
If your argument is that we should 'Buy American' to subsidize low-skill/low-income workers while limiting the earning potential of high-skill/high-income workers, then I dig it, but honestly the easier/better solution is a more progressive tax regime/welfare state.
We're talking about tax and the ultra-wealthy. We're talking about what happens when the world's richest person (+/- 2) spends US$500M of realized capital gains outside of the country of residence.
I am not talking about "forc[ing] all Americans to "Buy American".
I am not talking about "forc[ing] all Americans to "Buy American".
> It's important to keep in mind that even when that money is spent, there's no guarantee it'll be spent domestically.
This is literally the comment I was replying to. As far as I can read, the parent comment was about the location of consumption and the effect that has on an economy (which I think is significantly more nuanced than the parent implied)
It’s also 100% worth noting that we have no idea who bought those shares from Jeff (ignoring the fact that his liquidity is mostly from loans against his holdings). The US majorly benefits from foreigners buying shares in our companies and (surprise) that’s one of the major reasons we can support our trade imbalance.
So I’m mostly just confused about your point, I guess?
I think we agree that progressive taxation is probably good, but do we disagree about the effect that non-domestic consumption has on the US economy?
This is literally the comment I was replying to. As far as I can read, the parent comment was about the location of consumption and the effect that has on an economy (which I think is significantly more nuanced than the parent implied)
It’s also 100% worth noting that we have no idea who bought those shares from Jeff (ignoring the fact that his liquidity is mostly from loans against his holdings). The US majorly benefits from foreigners buying shares in our companies and (surprise) that’s one of the major reasons we can support our trade imbalance.
So I’m mostly just confused about your point, I guess?
I think we agree that progressive taxation is probably good, but do we disagree about the effect that non-domestic consumption has on the US economy?
The US doesn't need to produce yachts (or this particular type of yacht), thats the whole idea of trade, you specialise in some things not others, and everyone ends up better off. There are a huge number of components in a yacht, many American. And financing and so on.
That's not relevant to the point (although I'd also disagree with this entire premise, the root of tariff-free global trade). The point is that when someone (e.g. Bezos) spends US$500M of realized gain, it doesn't necessarily get spent in the USA. That's all.
Why would Bezos finance a 500M yacht with his net worth?
Same reason you might buy a pack of bubblegum.
I get where that question comes from, but I think it's the wrong question. The real question is, how would any realistic action that would cause US companies and people to spend more of their money in the US affect global trade in the aggregate?
While all participants in global trade are net beneficiaries, the US has done particularly well. Protectionism is usually a two-way affair; if we make it harder for us to spend money abroad, other countries will likely reciprocate. This doesn't somehow even out to make us (or them) better-off for doing it -- it simply contracts the global division of labor and introduces deadweight loss, decreasing the overall efficiency of the system and making all parties worse-off... except for a few well-connected companies that get artificially protected from competition and have enough connections to lobby successfully for price supports or other pork benefits.
While all participants in global trade are net beneficiaries, the US has done particularly well. Protectionism is usually a two-way affair; if we make it harder for us to spend money abroad, other countries will likely reciprocate. This doesn't somehow even out to make us (or them) better-off for doing it -- it simply contracts the global division of labor and introduces deadweight loss, decreasing the overall efficiency of the system and making all parties worse-off... except for a few well-connected companies that get artificially protected from competition and have enough connections to lobby successfully for price supports or other pork benefits.
It's not about making it harder to spend money abroad (at least not in this context).
It's about a tax structure that some mitigates against the downsides of the ultra-rich realizing capital gains and spending the proceeds outside their country of residence.
It's about a tax structure that some mitigates against the downsides of the ultra-rich realizing capital gains and spending the proceeds outside their country of residence.
It's more important to keep in mind that Amazon created hundreds of thousands of new jobs, raised minimum wage in many areas, and brought many people out of absolute poverty. No matter which way you look at it, a net positive rather than a negative.
> No matter which way you look at it, a net positive rather than a negative.
You just listed the positives, without any the negatives, and without any sign of actually weighing one against the other.
I don't know if Amazon is a net social positive, but it certainly isn't obvious and the answer coudl very well be no despite the positives.
ps. I helped create Amazon.
You just listed the positives, without any the negatives, and without any sign of actually weighing one against the other.
I don't know if Amazon is a net social positive, but it certainly isn't obvious and the answer coudl very well be no despite the positives.
ps. I helped create Amazon.
"It's more important to keep in mind that the CCP created hundreds of thousands of new jobs, raised minimum wage in many areas, and brought many people out of absolute poverty. No matter which way you look at it, a net positive rather than a negative."
Your logic seems highly suspect.
Your logic seems highly suspect.
The CCP created hundreds of millions of new jobs and brought hundreds of millions of people out of absolute poverty.
The CCP has its problems, but you must respect that so much economic growth has never happened so quickly for so many people in human history. A lot of people are living happier, more productive, more interesting lives because of the actions of the CCP.
The CCP has its problems, but you must respect that so much economic growth has never happened so quickly for so many people in human history. A lot of people are living happier, more productive, more interesting lives because of the actions of the CCP.
The question is would a similar number jobs have been created had there been another ruling party. It’s like giving trump credit for investing in the vaccine, it’s a near guarantee given America’s economy that the vaccine would have been invested in even if Mickey Mouse had been president. In my mind, neither Biden nor Trump get any credit for the vaccines.
China saw massive famines due to the Great Leap Forward, ccp policy, killing millions. How do we know that had a different government been in power the jobs wouldn’t be created, perhaps faster like with Taiwan, and at the same time the famines avoided? So no, I’m not going to give the ccp credit for creating jobs that like as not would have anyway been created.
China saw massive famines due to the Great Leap Forward, ccp policy, killing millions. How do we know that had a different government been in power the jobs wouldn’t be created, perhaps faster like with Taiwan, and at the same time the famines avoided? So no, I’m not going to give the ccp credit for creating jobs that like as not would have anyway been created.
Obviously, there are drawbacks with the CCP (and Amazon), but I can tell you one damn thing for sure: those people would not have been lifted out of poverty under the socialist/communist regime of Mao. Under that regime, people were mocked and tortured for working harder than others and trying to innovate. Deng Xiaoping embraced free markets and their own flavor of capitalism to bring this net positive to China.
When a government drastically restricts economic freedoms and then restricts them less than they did, you shouldn't praise that government for causing the increased prosperity that results -- it was their fault it wasn't happening in the first place, and they "helped" by getting out of the way. Sure, you can say the Deng Xiaoping CCP isn't the same as Mao's CCP, and there are aspects of that which are true. But at most, Deng's CCP was simply reducing the drastic limits on economic freedoms that the party had put in place. They're not causing the prosperity -- they're declining to continue stopping that prosperity from happening.
Yes, I heard the Uighurs lives got a lot more interesting — but not quite yet as interesting as did the Jews of Germany, when the Nazi regime lifted a nation broken by war out of its funk.
It's simply monstrous that we would compare Amazon — whatever criticisms someone might have for the company's business practices — with Communist China, and something like that needs to be called out.
It's simply monstrous that we would compare Amazon — whatever criticisms someone might have for the company's business practices — with Communist China, and something like that needs to be called out.
You mean without Amazon, we would not be buying at Whole Foods for example? You mean there are net new jobs not just jobs that may have been lost in my company? I understand Amazon's benefits, and I know someone else may not have executed as well thereby slowing progress, but who knows maybe YouTube tv with it's bundled benefit of YouTube shopping would be ruling the world and we would be discussing that :)
We’ll, those $500 million came from all over the world too, so it doesn’t seem surprising to see them being spent all over the world
As US income inequality began a marked increase in the 1980s, the richest 1 percent of households increased their savings while the bottom 90 percent fell into debt. Research finds that lenders indirectly used the top 1 percent’s savings to finance this borrowing, essentially enabling the rich to benefit from the bottom 90 percent’s debt repayments.
This does not imply causality as the author mistakenly assumes. Maybe the bottom 90% have more debt simply because costs are rising faster than wages and ability to save. Maybe the rich can save more because thy earn more.
This does not imply causality as the author mistakenly assumes. Maybe the bottom 90% have more debt simply because costs are rising faster than wages and ability to save. Maybe the rich can save more because thy earn more.
This. I struggle to see how higher savings by the wealthy can cause me to take on any more debt. Is the argument the wealthy use cash to invest in assets (houses), thus driving up the price and causing middle and lower class people to be forced to borrow more to buy a house?
But people do want to own homes, but the problems is debt and the fact that homes are seen as a way to accumulate wealth. Affordable housing clashes with that.
Also, the article seem to treats building a new road as an unalloyed good.
Also, the article seem to treats building a new road as an unalloyed good.
> homes are seen as a way to accumulate wealth
It's worth having a discussion about whether this makes sense and is something to strive for.
Unfortunately, because society has been based on this for so long, the people who spent their lives paying off a 30 year mortgage would never agree to make any changes that would reduce the value of their house. You'd need to come up with a plan to transition away from a house-based model of wealth over a long enough period of time where current home owners don't get screwed but people know what it means to buy a house now.
And I don't think any plan that's long-term enough to be sensible could actually survive politics long enough to be successfully implemented.
It's worth having a discussion about whether this makes sense and is something to strive for.
Unfortunately, because society has been based on this for so long, the people who spent their lives paying off a 30 year mortgage would never agree to make any changes that would reduce the value of their house. You'd need to come up with a plan to transition away from a house-based model of wealth over a long enough period of time where current home owners don't get screwed but people know what it means to buy a house now.
And I don't think any plan that's long-term enough to be sensible could actually survive politics long enough to be successfully implemented.
Do you think advertisement works? It is certainly possible, using advertising, to convince many people that NOW is the special time when taking on debt is actually OK, because rising house prices lift all boats. (Not really that different from any other gold rush..)
Which is what happened before 2008, when there was very little oversight in borrowing (e.g. NINJA loans). We know empirically that if the lenders are not obligated to make sure that the loans can be repayed, predatory lending will occur and cause social problems.
Which is what happened before 2008, when there was very little oversight in borrowing (e.g. NINJA loans). We know empirically that if the lenders are not obligated to make sure that the loans can be repayed, predatory lending will occur and cause social problems.
Savings is probably confusing here, because savings change based on your socioeconomic position. People go from not saving anything, to saving cash, to saving in assets.
Some of these assets have a poorer counterparty who is getting access to that money in return for repayment + interest. Perversely, the more money is available in these assets, the lower the interest rate and so the more money these counterparties can borrow. This drives up the cost of physical assets being bought with this money, like homes, because the value of the home is dictated by the debt load a buyer can bear. Lower interest rates means you can support more debt, which means someone will take on more debt and outcompete you for that house.
Some of these assets have a poorer counterparty who is getting access to that money in return for repayment + interest. Perversely, the more money is available in these assets, the lower the interest rate and so the more money these counterparties can borrow. This drives up the cost of physical assets being bought with this money, like homes, because the value of the home is dictated by the debt load a buyer can bear. Lower interest rates means you can support more debt, which means someone will take on more debt and outcompete you for that house.
I'm definitely speculating, but I could see banks having a glut of money to loan contributing to the low interest rates that have existed for a while now (thinking of money from a supply/demand perspective). With those lower interest rates leading to more interest in buying homes and pushing up prices (during the subprime crisis, to folks that couldn't necessarily afford it). While you'd also expect a housing construction boom, its certainly plausible that the industry would have to play catch up to demand. (It seems easier to me to hire a realtor to go look at homes than to start or expand a construction business). Zoning/other regulations can also slow down that process. The low interest rates also make larger/more expensive homes more feasible for buyers, due to the fact that a smaller percentage of the monthly payment is interest. I could certainly see ways that the above would lead to an individual having a higher debt load than they otherwise would.
They are not forcing you, it's that the 1% have savings and want that savings to make money so it's invested. Portions of that investment go into banks who loan out money to the middle class.
The middle class uses this money to buy cars/houses which helps the 1% to increasing their savings, which they then invest a portion of into banks...
BUT like another comment discussed, a lot of this is going over seas. Right now this cycle is pushing US asset values higher, but at some point this will come crashing down, and the money that was invested in under inflated markets will be valued correctly/over valued.
At which point that money will flow back into the US.
The middle class uses this money to buy cars/houses which helps the 1% to increasing their savings, which they then invest a portion of into banks...
BUT like another comment discussed, a lot of this is going over seas. Right now this cycle is pushing US asset values higher, but at some point this will come crashing down, and the money that was invested in under inflated markets will be valued correctly/over valued.
At which point that money will flow back into the US.
Banks, having surplus cash, offer low-monthly-payment loans which allows more people to buy them, by the way earning 0.6-0.8 * X to the banks.
Since there is a lot of cheap credit price stops constraining the demand side. You can get almost arbitrary large loan with arbitrary long timespan. This causes prices to rise. Houses seem like good investment so wealthy buy them restricting supply side, causing prices to rise even higher.
Rising prices make it impossible for most to save for the house. They have to take loans.
Now poor people who want house need to pay the inflated price + credit fees on top of that. Sellers see their assets rise in value, creditors see more customers and more revenue.
If there was no cheap credit then the prices wouldn't rise so much because nobody would be buying them.
Now, I don't know how true is all above but that seems to be the explanation of the issue I've seen many times.
Since there is a lot of cheap credit price stops constraining the demand side. You can get almost arbitrary large loan with arbitrary long timespan. This causes prices to rise. Houses seem like good investment so wealthy buy them restricting supply side, causing prices to rise even higher.
Rising prices make it impossible for most to save for the house. They have to take loans.
Now poor people who want house need to pay the inflated price + credit fees on top of that. Sellers see their assets rise in value, creditors see more customers and more revenue.
If there was no cheap credit then the prices wouldn't rise so much because nobody would be buying them.
Now, I don't know how true is all above but that seems to be the explanation of the issue I've seen many times.
No, nobody is buying your products. Nobody wants to hire you. Nobody is investing in a company that will hire you. If you have no income you must go into debt. It's that simple.
> This does not imply causality as the author mistakenly assumes. Maybe the bottom 10% have more debt simply because costs are rising faster than wages and ability to save. Maybe the rich can save more because thy earn more.
You can't choose one sentence and refute the whole article based on it. It's a part of a whole. The point of the article is to make that causal link.
You can't choose one sentence and refute the whole article based on it. It's a part of a whole. The point of the article is to make that causal link.
The one sentence is representative of a lack of causal arguments and the use of whimsical speculation to replace providing evidence for said casual arguments.
I could argue that liberalization of global capital flows allowed significant foreign investment leading to an abnormally low interest rate regime, which is why everyone (rich and poor) has taken on more debt, and I guarantee you that the rich take on far more debt than the poor. But as the poor tend to have mostly human capital on their balance sheet while the rich have assets, it creates an appearance that the poor have net debt (which they do not) while the rich have net assets (which they do). In fact both the poor and rich are solvent -- have more assets than debt, but the assets of the poor are future wage earnings. Thus in any reduction of interest rates, the poor will disproportionately benefit over the rich and will take advantage of this to increase borrowing.
E.g. if you are rich then both your assets and your liabilities will grow in lockstep (at the macro level). But if you are poor, then your assets are your wages which do not grow in lockstep with interest rates. Thus a reduction of interest rates disproportionately helps the poor to borrow more but an increase disproportionately hurts their ability to borrow. These are just some of the interesting effects when you seriously look at debt-dynamics and interest regimes. But in no regime can you make a case that the mere existence of the rich somehow causes the poor to borrow.
Yet the reason for low interest rates and the fact that such low rates are responsible for both the behavior of the rich and poor are not covered in this piece. In fact it used to be the case that Rebecca's predecessors would bemoan the fact of how the poor were locked out of credit markets and thus unable to participate in the wealth-creating business of taking on debt to purchase long-lived assets, and thus they had to rent an apartment instead of being able to buy a house, or could not borrow to get a more reliable car on credit, etc. Now that those barriers have been substantially reduced, there is lots of hand-wringing about how the poor are taking on debt. This amnesia is funny to those of us who have been following this debate from times when rates were much higher and the poor borrowed very little. Then the complaint was "why are the rich locking the poor out of credit markets?" Resentment can be stoked in any situation. It is particularly hilarious because Keynes advocated for lowering interest rates in order to "euthanize the rentier" and he blamed the rentier class for keeping rates higher than they should have been. E.g. he blamed the rich for high interest rates. Now the argument is that rich are to blame for low interest rates. Keynes would be rolling over in his grave. But the persistent theme seems to be that the rich are to be blamed.
In fact there is nothing wrong with taking on debt. What matters is your ability to service the debt, and in a low interest rate regime, that service capacity is substantially increased, and thus so are debt levels. Perhaps this is not worth the trade off of increased financial fragility. Or perhaps it is -- data must be required and real arguments made. But merely the existence of the debt levels themselves -- again held both by poor and rich -- are not something to be avoided.
This blog post doesn't attempt to engage with any of this literature or provide any fact-based arguments about casual mechanisms or whether something is beneficial or harmful. It's just more hand-wringing, which is a shame as debt-dynamics, interest rate regimes, global investment flows and credit constraints are important topics that deserve to be treated seriously rather than as a political football in the resentment olympics.
I could argue that liberalization of global capital flows allowed significant foreign investment leading to an abnormally low interest rate regime, which is why everyone (rich and poor) has taken on more debt, and I guarantee you that the rich take on far more debt than the poor. But as the poor tend to have mostly human capital on their balance sheet while the rich have assets, it creates an appearance that the poor have net debt (which they do not) while the rich have net assets (which they do). In fact both the poor and rich are solvent -- have more assets than debt, but the assets of the poor are future wage earnings. Thus in any reduction of interest rates, the poor will disproportionately benefit over the rich and will take advantage of this to increase borrowing.
E.g. if you are rich then both your assets and your liabilities will grow in lockstep (at the macro level). But if you are poor, then your assets are your wages which do not grow in lockstep with interest rates. Thus a reduction of interest rates disproportionately helps the poor to borrow more but an increase disproportionately hurts their ability to borrow. These are just some of the interesting effects when you seriously look at debt-dynamics and interest regimes. But in no regime can you make a case that the mere existence of the rich somehow causes the poor to borrow.
Yet the reason for low interest rates and the fact that such low rates are responsible for both the behavior of the rich and poor are not covered in this piece. In fact it used to be the case that Rebecca's predecessors would bemoan the fact of how the poor were locked out of credit markets and thus unable to participate in the wealth-creating business of taking on debt to purchase long-lived assets, and thus they had to rent an apartment instead of being able to buy a house, or could not borrow to get a more reliable car on credit, etc. Now that those barriers have been substantially reduced, there is lots of hand-wringing about how the poor are taking on debt. This amnesia is funny to those of us who have been following this debate from times when rates were much higher and the poor borrowed very little. Then the complaint was "why are the rich locking the poor out of credit markets?" Resentment can be stoked in any situation. It is particularly hilarious because Keynes advocated for lowering interest rates in order to "euthanize the rentier" and he blamed the rentier class for keeping rates higher than they should have been. E.g. he blamed the rich for high interest rates. Now the argument is that rich are to blame for low interest rates. Keynes would be rolling over in his grave. But the persistent theme seems to be that the rich are to be blamed.
In fact there is nothing wrong with taking on debt. What matters is your ability to service the debt, and in a low interest rate regime, that service capacity is substantially increased, and thus so are debt levels. Perhaps this is not worth the trade off of increased financial fragility. Or perhaps it is -- data must be required and real arguments made. But merely the existence of the debt levels themselves -- again held both by poor and rich -- are not something to be avoided.
This blog post doesn't attempt to engage with any of this literature or provide any fact-based arguments about casual mechanisms or whether something is beneficial or harmful. It's just more hand-wringing, which is a shame as debt-dynamics, interest rate regimes, global investment flows and credit constraints are important topics that deserve to be treated seriously rather than as a political football in the resentment olympics.
"Maybe the rich can save more because thy earn more."
That's certainly a big part of it, but far from the only one.
When you're living paycheck to paycheck you have no money to invest, so the poor are usually limited to earning only as much as their poorly paying jobs will pay them, while the salaries of the rich usually only make up a small to non-existent portion of their wealth.
On top of that, at least in the US, capital gains are taxed at a much lower rate than income, so those whose income makes up a large fraction of what they earn are doubly screwed.
For the really poor, food expenses are a significant portion of their expenses, and yet many of them live in food deserts where food is not only less nutritious and less varied than what the rich have access to, but that food is often more expensive.
If as a poor person you have to take out a payday loan to get by, you're also going to be paying through the nose for that.
Predatory lending practices are also widely employed against the poor.
If you can't afford your own home (or to own a home but never pay it off), you could wind up paying way more in rent or mortgage payments than if you had bought a home outright in cash and never had to pay any interest on it at all.
That's not to mention medical expenses, which often bankrupt people in America... or legal expenses, which the poor often can't afford and wind up going to jail because of.
Finally, its the wealthy and powerful who write the laws and and use their connections in and various forms of bribes of government to favor mostly themselves, their friends and families. The poor do not have this sort of pull, and are often led by the nose by the rich to vote against their own interests.
That's certainly a big part of it, but far from the only one.
When you're living paycheck to paycheck you have no money to invest, so the poor are usually limited to earning only as much as their poorly paying jobs will pay them, while the salaries of the rich usually only make up a small to non-existent portion of their wealth.
On top of that, at least in the US, capital gains are taxed at a much lower rate than income, so those whose income makes up a large fraction of what they earn are doubly screwed.
For the really poor, food expenses are a significant portion of their expenses, and yet many of them live in food deserts where food is not only less nutritious and less varied than what the rich have access to, but that food is often more expensive.
If as a poor person you have to take out a payday loan to get by, you're also going to be paying through the nose for that.
Predatory lending practices are also widely employed against the poor.
If you can't afford your own home (or to own a home but never pay it off), you could wind up paying way more in rent or mortgage payments than if you had bought a home outright in cash and never had to pay any interest on it at all.
That's not to mention medical expenses, which often bankrupt people in America... or legal expenses, which the poor often can't afford and wind up going to jail because of.
Finally, its the wealthy and powerful who write the laws and and use their connections in and various forms of bribes of government to favor mostly themselves, their friends and families. The poor do not have this sort of pull, and are often led by the nose by the rich to vote against their own interests.
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> This does not imply causality as the author mistakenly assumes. Maybe the bottom 90% have more debt simply because costs are rising faster than wages and ability to save. Maybe the rich can save more because thy earn more.
If it's easier to borrow money, costs will go up. Look at college education over the past half century, or housing vs interest rates.
So if some people start taking on more debt than they should because it's easier, a lot of other people are pushed into it even if they wouldn't have originally when they're priced out by the borrowers.
If it's easier to borrow money, costs will go up. Look at college education over the past half century, or housing vs interest rates.
So if some people start taking on more debt than they should because it's easier, a lot of other people are pushed into it even if they wouldn't have originally when they're priced out by the borrowers.
>Maybe the bottom 90% have more debt simply because costs are rising faster than wages and ability to save.
You just rephrased the article. What you are saying is identical to what the article said.
If companies don't borrow money from the wealthy and don't spend their money on hiring people or higher wages then then there are unemployed people who must (emphasis on must) consume (think of food and rent) in excess of their income because their income is 0 and the only way they can keep consuming is by going into debt. Therefore what you and the article said is the same thing.
You just rephrased the article. What you are saying is identical to what the article said.
If companies don't borrow money from the wealthy and don't spend their money on hiring people or higher wages then then there are unemployed people who must (emphasis on must) consume (think of food and rent) in excess of their income because their income is 0 and the only way they can keep consuming is by going into debt. Therefore what you and the article said is the same thing.
No. It’s housing prices pumped by federal loan guarantees.
Yeah, the government also artificially suppresses interest rates, making it easier to get mortgages yet somehow the blame goes to the lenders.
> somehow the blame goes to the lenders
I find this statement quite tone-deaf. It’s hard to blame people for wanting a roof over their heads.
I find this statement quite tone-deaf. It’s hard to blame people for wanting a roof over their heads.
It's the neoliberal mindset and everyone is falling for it. Pretty much every party in Germany is neoliberal. The irony is that a lot of neoliberal thinking is self defeating.
Honestly, after I learned about neoliberalism I came to peace with the world because I know everyone deserves their suffering and there is no injustice. All those republican voters are voting for their own doom. It's fantastic. I no longer need to feel bad about their suffering because there is no contradiction, no conspiracy theory, no trick, no evil cartoon villain behind the scenes.
Honestly, after I learned about neoliberalism I came to peace with the world because I know everyone deserves their suffering and there is no injustice. All those republican voters are voting for their own doom. It's fantastic. I no longer need to feel bad about their suffering because there is no contradiction, no conspiracy theory, no trick, no evil cartoon villain behind the scenes.
Can you give an example of a country that archived economic prosperity using leftist policies?
I also find your comment on republicans quite wrong, since I don't see many differences between republicans vs democrats.
Both have been running ever increasing deficits, each president tops all previous presidents combined.
You can't really say any of the US policies have liberal.
I also find your comment on republicans quite wrong, since I don't see many differences between republicans vs democrats.
Both have been running ever increasing deficits, each president tops all previous presidents combined.
You can't really say any of the US policies have liberal.
What is ‘neoliberal’ thinking? Seems like a made-up word.
Maybe you’re thinking of borrowers? Lenders are the ones who give the loans and make money from interest.
We don't seem to have houses for everyone, people gotta work and produce to earn a house.
If you start giving mortgages with artificially low interest rates, people who haven't produced things to offset their consumption will get houses, which will increase the prices.
Of course a lot of other factors play roles into this.
> It’s hard to blame people for wanting a roof over their heads.
I, in turn, find your statement quite naive, it would be great if everyone had a house, that doesn't mean we should just give it them, there are consequences, the prices will rise.
If you start giving mortgages with artificially low interest rates, people who haven't produced things to offset their consumption will get houses, which will increase the prices.
Of course a lot of other factors play roles into this.
> It’s hard to blame people for wanting a roof over their heads.
I, in turn, find your statement quite naive, it would be great if everyone had a house, that doesn't mean we should just give it them, there are consequences, the prices will rise.
Unfortunately it doesn't. It's artificially keeping them up because 0% is the effective lower bound and interest rates should be well into negative territory because savers don't care that their savings do not represent real wealth in the economy.
No it isn't, the FED is buying mortgages and treasuries to keep the rates from rising.
How can you say rates would be higher absent the FED buying it?
Rates aren't negative nominally, but they are negative taking inflation into account.
How can you say rates would be higher absent the FED buying it?
Rates aren't negative nominally, but they are negative taking inflation into account.
They are saying rich people are indirectly financing poor peoples' debt by owning stocks and bonds because corporations are then stockpiling cash. Not very convincing as a causal reason the middle class got buried in debt. Just taking advantage of the rich v. poor narrative
To these journalists that have little understanding of economics, it's always a zero-sum game. They make up their own economics.
debt and credit are zero-sum. The part that isn't necessarily zero-sum is productivity. So, debt/credit patterns can lead to productivity, depending on the details.
But I think the real point here is that when investments are dependent on others' debt and not on other types of returns, there's a whole system that is built on promoting debt, selling people on accepting debt…
But I think the real point here is that when investments are dependent on others' debt and not on other types of returns, there's a whole system that is built on promoting debt, selling people on accepting debt…
Indeed, generally almost everything in economics is at best zero sum outside of productivity.
That's the reason the US government is running deficits. It's because it is rescuing consumers from the burden of taking on that debt.
In nominal terms, they are zero-sum. If you consider inflation then debtors have the advantage since we live in an inflationary economy, so wages will keep pace with general inflation but the debt amount remains constant.
Debt is an essential part to accelerating growth if used for productive investments (say, a degree in computer science). What the "middle class" (really the working poor but people call it the middle class) are using debt for is not productive; when we have layaway and things like Affirm financing, etc. we have lots of debt being used to purchase luxury goods and services. You can argue the "system" is to blame for people buying electronics on layaway or you can blame the people for being irresponsible.
To whoever is going to respond by saying poor people buy food on credit cards: you can't use layaway and Affirm like services for food.
Debt is an essential part to accelerating growth if used for productive investments (say, a degree in computer science). What the "middle class" (really the working poor but people call it the middle class) are using debt for is not productive; when we have layaway and things like Affirm financing, etc. we have lots of debt being used to purchase luxury goods and services. You can argue the "system" is to blame for people buying electronics on layaway or you can blame the people for being irresponsible.
To whoever is going to respond by saying poor people buy food on credit cards: you can't use layaway and Affirm like services for food.
>If you consider inflation then debtors have the advantage since we live in an inflationary economy
If inflation > interest. Otherwise, no.
If inflation > interest. Otherwise, no.
"middle class" is not merely a term for how wealthy people are, it can also mean like professionals who do jobs beyond that of the "working" or "labor" class but are not the capitalist investor/owner class that employs the working class.
The issue of debt used poorly for consumption that isn't investment (e.g. fancy TV), the critique isn't a vague "the system", the critique is that advertisers and sales tactics are very specifically designed to manipulate people into such decisions. But the "system" aspect is about whether the assumptions behind larger investment patterns are set up to basically require that such debt-based consumption happen.
The issue of debt used poorly for consumption that isn't investment (e.g. fancy TV), the critique isn't a vague "the system", the critique is that advertisers and sales tactics are very specifically designed to manipulate people into such decisions. But the "system" aspect is about whether the assumptions behind larger investment patterns are set up to basically require that such debt-based consumption happen.
> "middle class" is not merely a term for how wealthy people are, it can also mean like professionals who do jobs beyond that of the "working" or "labor" class
If they live primarily by renting out labor, they are part of the working class (for “intellectual” labor, the proletarian intelligentsia) while if their support comes from a rough balance of capital and labor (especially appyling their own labor to their own capital as independent business operators), they are genuinely part of the middle (petit bourgeois) class, no matter whether the kind of work is the same done by blue-collar laborers or not.
If they live primarily by renting out labor, they are part of the working class (for “intellectual” labor, the proletarian intelligentsia) while if their support comes from a rough balance of capital and labor (especially appyling their own labor to their own capital as independent business operators), they are genuinely part of the middle (petit bourgeois) class, no matter whether the kind of work is the same done by blue-collar laborers or not.
Investment and savings must always be in balance. If the savings rate of one person exceed the total investment rate then another person must save less than the investment rate. The non zero sum answer is to increase the investment rate and put the money to good use by employing people. The article is about how that is not happening.
i.e. companies have stopped borrowing money and instead fund themselves through issuing stock but strangely enough they do not sell the stock when they need it, they keep large portions in their own bank accounts. If companies and the rich are not borrowing, then either consumers or the government must borrow the money. Consumers take on mortgages to buy increasingly expensive houses but as 2008 has shown an overpriced house is a poor investment that drains productivity from the economy.
Please refrain from bashing the journalist. He is not making up his own economics, he's stating the obvious.
i.e. companies have stopped borrowing money and instead fund themselves through issuing stock but strangely enough they do not sell the stock when they need it, they keep large portions in their own bank accounts. If companies and the rich are not borrowing, then either consumers or the government must borrow the money. Consumers take on mortgages to buy increasingly expensive houses but as 2008 has shown an overpriced house is a poor investment that drains productivity from the economy.
Please refrain from bashing the journalist. He is not making up his own economics, he's stating the obvious.
> If the savings rate of one person exceed the total investment rate then another person must save less than the investment rate.
Yes, at the macro level, investment (defined as an increase in capital equipment or inventories) must equal savings in terms of national accounts, but incomes and rates as well as the foreign sector all adjust to make it so. You cannot say one controls the other. It is an equilibrium condition on a number of variables.
It's like saying that the quantity of stocks bought is the quantity of stocks sold - an equilibrium relationship -- and so whether stock volumes go up or down is completely determined by sellers -- a casual mechanism invented that satisfies the equilibrium relationship even though it is false.
So you cannot take an equilibrium result involving many variables and use that to deduce that one of the variables is independent and the other is dependent just by linguistic or emotional affinity.
Next, that type of savings/investment identity in the national accounts has nothing to do with financial borrowing/saving of the household sector nor even of "the poor" or "the 1%". What you are thinking of -- say a household takes out a mortgage to buy a house -- is a balance sheet expansion that is invisible to the national accounting and contributes nothing to savings or investment. What would contribute to savings/investment would be when the house is remodeled. So if I invest in my house by adding a better bathroom, then that will add savings to the economy as a whole. You can imagine that various inputs, for example, cement, are consumed in the course of expanding the bathroom, so the savings is the value add -- e.g. the value of the improvement net of the consumption required to make the improvement. And over the economy as a whole, if you add up all the savings (in terms of capital), you will get all the investment (when things like inventories are property treated). But this is not what the blogger means when she is complaining about "the 1%".
Yes, at the macro level, investment (defined as an increase in capital equipment or inventories) must equal savings in terms of national accounts, but incomes and rates as well as the foreign sector all adjust to make it so. You cannot say one controls the other. It is an equilibrium condition on a number of variables.
It's like saying that the quantity of stocks bought is the quantity of stocks sold - an equilibrium relationship -- and so whether stock volumes go up or down is completely determined by sellers -- a casual mechanism invented that satisfies the equilibrium relationship even though it is false.
So you cannot take an equilibrium result involving many variables and use that to deduce that one of the variables is independent and the other is dependent just by linguistic or emotional affinity.
Next, that type of savings/investment identity in the national accounts has nothing to do with financial borrowing/saving of the household sector nor even of "the poor" or "the 1%". What you are thinking of -- say a household takes out a mortgage to buy a house -- is a balance sheet expansion that is invisible to the national accounting and contributes nothing to savings or investment. What would contribute to savings/investment would be when the house is remodeled. So if I invest in my house by adding a better bathroom, then that will add savings to the economy as a whole. You can imagine that various inputs, for example, cement, are consumed in the course of expanding the bathroom, so the savings is the value add -- e.g. the value of the improvement net of the consumption required to make the improvement. And over the economy as a whole, if you add up all the savings (in terms of capital), you will get all the investment (when things like inventories are property treated). But this is not what the blogger means when she is complaining about "the 1%".
You're getting hammered for your comment, but you're not wrong. This article is far more political than economic. It's politics is attack the rich; and as for its economics, it's a lot of neo-Keynesian trash.
The article claims that savings by the rich is fueling both consumer debt and government debt, when in fact it's closer to the other way around. Government debt — monetary policies that inflate the money supply via government debt — is fueling profligate consumer spending with cheap consumer credit made available by easy-money policies.
The ignorance here is destructive.
The article claims that savings by the rich is fueling both consumer debt and government debt, when in fact it's closer to the other way around. Government debt — monetary policies that inflate the money supply via government debt — is fueling profligate consumer spending with cheap consumer credit made available by easy-money policies.
The ignorance here is destructive.
> it's a lot of neo-Keynesian trash.
No, Keynes argued that the rich keep interest rates too high and prevent the poor from taking on debt. For this reason he advocated for low (zero, actually) interest rates and programs to encourage more borrowing. Basically Keynes got everything he wanted and now the present outrage is that debt is too high and the poor are allowed to borrow whereas before they were prevented from doing it. In fact the long march of history consisted of a sequence of credit easing measures, even including government guarantees, in order to extend credit market access to virtually everyone, with things like underwriting standards deemed to be racist and in need of weakening. The end result is almost everyone can borrow today and at historically low rates which leads to, surprise, a situation in which debt levels are historically high. Then that, too, is blamed on "the 1%".
At least Keynes had a sense of history and wasn't walking in the Eternal Now.
No, Keynes argued that the rich keep interest rates too high and prevent the poor from taking on debt. For this reason he advocated for low (zero, actually) interest rates and programs to encourage more borrowing. Basically Keynes got everything he wanted and now the present outrage is that debt is too high and the poor are allowed to borrow whereas before they were prevented from doing it. In fact the long march of history consisted of a sequence of credit easing measures, even including government guarantees, in order to extend credit market access to virtually everyone, with things like underwriting standards deemed to be racist and in need of weakening. The end result is almost everyone can borrow today and at historically low rates which leads to, surprise, a situation in which debt levels are historically high. Then that, too, is blamed on "the 1%".
At least Keynes had a sense of history and wasn't walking in the Eternal Now.
The article isn't Keynesian, nor is Keynesianism trash. I do agree that ignorance is destructive.
Take away the word "profligate" from consumer spending and you'll be closer to the truth. Median real wages have been falling for the last 50 years. We need a little tightness in the labor market to change that, and risking some inflation in a period of negligible inflation seems like a wise choice.
Take away the word "profligate" from consumer spending and you'll be closer to the truth. Median real wages have been falling for the last 50 years. We need a little tightness in the labor market to change that, and risking some inflation in a period of negligible inflation seems like a wise choice.
Perhaps I'm painting with too broad a brush, and if we want to get into a technical argument, I will concede your point; but when I see multiplier effect and savings glut, I don't really need to see much more. The thrust of this is the "market" has failed and more government intervention is the answer. This is the destructive ignorance I'm referring to.
The article was crap, I agree. Keynes would be better characterized by discussing government intervention to address a market failure, rather than saying the market has failed, which has different connotations.
Personally, I disagree with calling government choices an intervention, because the government is a market participant, and both the market and government are embedded in the society which creates them.
Personally, I disagree with calling government choices an intervention, because the government is a market participant, and both the market and government are embedded in the society which creates them.
I have a basic theory that 'journalists' don't generally understand math, economic or finance. For one, if they did, they wouldn't choose to become journalists. As a result, they surround themselves with a bubble of low math and finance skills and are prone to misunderstand and conflate basic concepts like assets and income.
I thought it was more that rich people use excess funds and debt to buy more income producing assets.
Poor people have no excess cash and use debt to buy goods from companies and therefore the wealthy shareholders accumulate even more money.
Only 55% of the nation own stocks. The top 1% own 38% of the stocks.
Poor people have no excess cash and use debt to buy goods from companies and therefore the wealthy shareholders accumulate even more money.
Only 55% of the nation own stocks. The top 1% own 38% of the stocks.
I'm a bit confused reading this, the argument that the 1%+ echelon are ~= to corporations in an aggregate model, and that effectively corporations are underinvesting?
Or rather that the 1% are under-consuming, and so any evaluations of net household saving/consumption are skewed because there is dramatically more saving on one side and more aggregate debt on the other. I haven't seen what recent levels of corp/household/gov/balance spending/saving are.
I also like to refer to this post for these kind of macro questions. I'm not an economist, but it's interesting to see how all the pieces fit together.
https://nathantankus.substack.com/p/where-do-profits-come-fr...
I also like to refer to this post for these kind of macro questions. I'm not an economist, but it's interesting to see how all the pieces fit together.
https://nathantankus.substack.com/p/where-do-profits-come-fr...
Wouldn’t the effect of hoarding wealth be anti inflationary? If it’s not being spent then it might as well not exist in which case it’s as if all of the money was confiscated and deleted by the government anyways?
It isn't being hoarded, it is being lent out.
Literally hoarding... as in under your mattress? Yes.
Instead, your ‘hoarders’ are loaning their money to a bank which then in turns loans many multiples of that money to borrowers.
Instead, your ‘hoarders’ are loaning their money to a bank which then in turns loans many multiples of that money to borrowers.
Hoarding Bitcoin is deflationary. "Hoarding" USD in a bank account can be deflationary if there is not enough demand for loans or if the borrowed money never reaches the real economy.
>Wouldn’t the effect of hoarding wealth be anti inflationary?
Only if it's being hoarded as cash - something almost nobody does.
If it's being hoarded in the form of assets, you'll see rampant asset inflation instead.
Only if it's being hoarded as cash - something almost nobody does.
If it's being hoarded in the form of assets, you'll see rampant asset inflation instead.
Is it just me, or is Chicago Booth beginning to publish more pop-econ articles that question the simplistic reality of the so-called "Chicago School of Economics" ?
> “People get angry about seeing the rich consuming a lot,” Sufi says, “but that’s better than what they’re actually doing.”
I’m going to use that line
I’m going to use that line
Money needs to move to benefit the economy. In my opinion, one of the big problems with the super-rich is they have more money than they can ever spend (over several lifetimes). This money is just siphoned out of the economy. We're taking natural resources and work and converting it into a number in a computer and that's it.
There is such a glut of money doing nothing that there is hardly any place to even invest it. You even have companies, like Apple, sitting on massive cash piles. A pandemic can't affect the stock market or housing because all this money needs somewhere to be.
There is such a glut of money doing nothing that there is hardly any place to even invest it. You even have companies, like Apple, sitting on massive cash piles. A pandemic can't affect the stock market or housing because all this money needs somewhere to be.
The central banks think they can make the money move if they buy everything reputable and force everyone else to consider buying less reputable things. This is somewhat happening but not in great enough numbers, one of the desired examples being SPACs buying startups where VC's and the whole population continue underservicing, the less desired examples being "meme" stocks but it is good when those companies recapitalize with direct issuances, unexpected examples being intangibles and obscure cryptos and I'm not offering an opinion about that, I do know it is not the point of the central banks monetary policy. They want people to be forced to invest in founders without pedigrees. Simple. As we can see, people would rather pay the government to not risk their own money like that, inflation concerns be damned.
The hoarded money will really move if the central banks A) stopped buying and B) sold everything
What Congress can do: keep wage workers on basic during recessionary periods and don't let the Fed buy bonds and mortgaged backed securities
So everything tanks to its natural market price while employers convulse and stop hiring, and more capital efficient organizations replace them, and the unemployment numbers can be ignored because they're fine for now
The hoarded money will really move if the central banks A) stopped buying and B) sold everything
What Congress can do: keep wage workers on basic during recessionary periods and don't let the Fed buy bonds and mortgaged backed securities
So everything tanks to its natural market price while employers convulse and stop hiring, and more capital efficient organizations replace them, and the unemployment numbers can be ignored because they're fine for now
There is another angle.
https://awealthofcommonsense.com/2021/05/did-hgtv-ruin-the-h...
What if young people burry themselves in debt because they want the instagram life now? What if they refuse to live according to their means?
https://awealthofcommonsense.com/2021/05/did-hgtv-ruin-the-h...
What if young people burry themselves in debt because they want the instagram life now? What if they refuse to live according to their means?
Vast majority of debt in the US is
Tuition, Housing and Medical
Complaining about avocado toast won't change that
Tuition, Housing and Medical
Complaining about avocado toast won't change that
Medical is one thing - housing and tuition is completely self-imposed. I make 6 figures in software but I went to New York City College. I graduated with zero debt (in fact, I got paid to study).
And I am still renting at 40. Getting an Instagram home takes time and saving for decades. It's always been this way.
And I am still renting at 40. Getting an Instagram home takes time and saving for decades. It's always been this way.
This. I think too many people can think to a friend who purchased their McMansion at 30 and think to themselves that buying a home is unattainable. I realized that it takes constant self-reflection and discipline to build a 20-50% down payment on a 15-year mortgage WHILE socking money away for retirement, 529, and HSA. Granted, rates are lower than they ever have been historically but borrowing to get rich is still leveraging. I get ticked off when talking to real estate agents who only think leveraging is the way. To be honest, I don't have a credit score any longer. It's called manual underwriting!
The article linked is about housing -- specifically younger people buying more house than they can afford.
I'm sure a similar argument could be made about education. I personally know a number of people up to their ears in debt for advanced degrees that have no economic value.
I'm sure a similar argument could be made about education. I personally know a number of people up to their ears in debt for advanced degrees that have no economic value.
The younger people that can qualify to buy a house aren't poor.
And this, in my humble opinion, is the reason why there has been a long term decreasing trend in interest rates for the last 40 years. And it will not reverse before the trend of wealth distribution getting more and more inequal reverses. So get used to the idea of increasing pressure to get functional negative interest rates.
Please explain this one more time to me. I thought banks were literally creating money when handing out credit. Banks are prohibited to loan money on their saving accounts, so amount of credit issued is not directly influenced by amount of money saved.
It is rather influenced by regulation on those things.
It is rather influenced by regulation on those things.
> After all, a yacht is rooted in the real economy. A good chunk of the money originally spent on the yacht went to pay workers and buy equipment
Sure. And then the rest of it went to profit. Knowing the yacht is 454 ft (what's the sqft on that? four digits?), costs $590m, and yet a tricked-out 66,000 sqft megamansion-ranch-thing is worth less than a quarter of that [https://www.latimes.com/business/story/2021-05-04/bill-gates...], I'm gonna take a guess that there's a loooooot of profit in that yacht. Which means that it's just 1%ers passing money around amongst themselves.
(Yes, I'm comparing apples and oranges here a bit, but I really have to question how much of that is going to materials and labor...)
Sure. And then the rest of it went to profit. Knowing the yacht is 454 ft (what's the sqft on that? four digits?), costs $590m, and yet a tricked-out 66,000 sqft megamansion-ranch-thing is worth less than a quarter of that [https://www.latimes.com/business/story/2021-05-04/bill-gates...], I'm gonna take a guess that there's a loooooot of profit in that yacht. Which means that it's just 1%ers passing money around amongst themselves.
(Yes, I'm comparing apples and oranges here a bit, but I really have to question how much of that is going to materials and labor...)
I'd say the real "problem" with spending on yachts and other luxuries is that it takes real value to make - skilled labourers and valuable materials going to something that doesn't provide that much human happiness. Not saying the ultra rich shouldn't be allowed to spend their money how they want, just that it does seem to have consequences to me.
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Oh well, yet another publication “rich bad, poor good”. I will leave out payday lending, buying small goods on credit etc. Lets talk about mortgages and student loan. Let’s face it, if you are rich you have become rich somehow or stayed rich ( even harder than first one) you probably understand risk management. What we have got here: you are lending your capital to folks who are less rich (much less trustworthy). Why you are lending to them if risk relatively is pretty high? Actually, its not student loans in most of civilized society is backed by government programs, mortgages is backed by GSEs. You can land money with relatively no risk at all. I am oversimplify but, many problems comes from politician will “help little people/protect little people” or called aswell “to get elected or reelected”. Our friends in government puts incentives to lend money to consumption without almost risk.
And I am from Europe/Baltics. We have got our own “helpful programmes”. Like government agency lends you downpayment for mortgage with pretty barbaric rate. So what happened, default downpayment have gone up from 10% to 15-20% to get skin in the game from lender. Who suffers the most? Those who have got these 10% for downpayment.
Can this be seen as simply hoarding money?
I think this is a very important thing to study some more. The entire system is built on the assumption that money goes round, never sits idle, and is always used to productive use in terms of growing production.
If it's true that there are issues at that level, we really need to better understand them and address them.
If we make things very simplistic. If I'm the only one that has a spear and I hunt a deer with it. I cannot eat it all. I'll have the best parts and a good chunk of it to satiety. Now I'm left with a lot more deer leftovers.
If I just froze it and never went hunting again for the next 4 weeks, by just eating more of that frozen deer. Keeping in mind I'm the only one with a spear. That be very bad economically, what are the others to hunt with? What are they all to eat?
Now, the morgage loans are like if someone comes and say, could I have some of your frozen deer to eat? And I were to say, yes you can have a little bit, but in repayment you owe me a full deer which you must give me in the next year (which others will need to hunt by hand, since they don't have a spear).
Over time, what happens is all hunted deers by everyone goes to me, as everyone owes me a deer. And I now own all hunted deers, trading more of its meat for more repayment of more deers.
The issue with this is that there's always a surplus of deer, and yet everyone is in dept and only eating a fraction. In effect, deer production is wasted.
Another issue with this, is that it did not contribute to boost production of deers or anything else.
A better scenario is that I don't freeze my leftover deer. Instead I trade it to others for other things. If I did this, I create a market for other goods, and I boost the production of more things. Like maybe I trade it to people and I ask in exchange for it to have a second spear built. This allows spear manufacturing to grow, and also it gives me two spears that I can now use to hunt more deer with. Having commissioned this, I also enabled someone else to learn how to make spears, which they can now make for themselves or others. You could assume prior to that they simply didn't have the time to explore making spears, because they constantly needed to hunt for food by hand just to survive.
So this explained three scenarios:
1. Money is horded idle, where I just freeze the deer for myself and live off of it for the next 4 weeks until I hunt again.
2. Money is invested in unproductive ways, creating a dept cycle of the poor while boosting my own wealth. Where I loan parts of my frozen deer in exchange for a future full deer from others.
3. Money is spent in productive investment. Where I don't freeze the deer at all, I simply spend it on the economy, such as by investing in say spear making. Which both increases my wealth (since I own two spears now), but also grew the economy (others can make spears now), while creating zero dept. Well, or potentially dept was that I give you some deer meet and you now owe me a spear, which in turn was more productive dept. (Depending if the relationship is Employer/Employee or Investor/Entrepreneur).
Number 3 is where we want to be at, and I'd say is the "idealistic Capitalist model" in a nutshell. It's very important we make sure we remain in #3. The good thing about number 3 is that while it's very possible I remain the richest man, and in fact it might make me richer than even #2 ever would have, since instead of owning all the deers with poor deer production, I now possibly own all deer hunting production, mechanisms, know how, and the whole deer production has become much more efficient, and I can own it's whole process, and maybe even I've now ventured in other things. I've also grown the economy as a whole, and raised the standard for what it means to be the poorest man.
In that perspective, the gap between rich and poor isn't as important as the standard of living. The gap might be bigger than in #2, yet everyone is better off.
But again, if we're slowly shifting to #2 over #3, then it means that I am becoming richer and richer, widening the gap, and everyone's else's lives are just as harsh as ever. We don't want that, we want #3.
If it's true that there are issues at that level, we really need to better understand them and address them.
If we make things very simplistic. If I'm the only one that has a spear and I hunt a deer with it. I cannot eat it all. I'll have the best parts and a good chunk of it to satiety. Now I'm left with a lot more deer leftovers.
If I just froze it and never went hunting again for the next 4 weeks, by just eating more of that frozen deer. Keeping in mind I'm the only one with a spear. That be very bad economically, what are the others to hunt with? What are they all to eat?
Now, the morgage loans are like if someone comes and say, could I have some of your frozen deer to eat? And I were to say, yes you can have a little bit, but in repayment you owe me a full deer which you must give me in the next year (which others will need to hunt by hand, since they don't have a spear).
Over time, what happens is all hunted deers by everyone goes to me, as everyone owes me a deer. And I now own all hunted deers, trading more of its meat for more repayment of more deers.
The issue with this is that there's always a surplus of deer, and yet everyone is in dept and only eating a fraction. In effect, deer production is wasted.
Another issue with this, is that it did not contribute to boost production of deers or anything else.
A better scenario is that I don't freeze my leftover deer. Instead I trade it to others for other things. If I did this, I create a market for other goods, and I boost the production of more things. Like maybe I trade it to people and I ask in exchange for it to have a second spear built. This allows spear manufacturing to grow, and also it gives me two spears that I can now use to hunt more deer with. Having commissioned this, I also enabled someone else to learn how to make spears, which they can now make for themselves or others. You could assume prior to that they simply didn't have the time to explore making spears, because they constantly needed to hunt for food by hand just to survive.
So this explained three scenarios:
1. Money is horded idle, where I just freeze the deer for myself and live off of it for the next 4 weeks until I hunt again.
2. Money is invested in unproductive ways, creating a dept cycle of the poor while boosting my own wealth. Where I loan parts of my frozen deer in exchange for a future full deer from others.
3. Money is spent in productive investment. Where I don't freeze the deer at all, I simply spend it on the economy, such as by investing in say spear making. Which both increases my wealth (since I own two spears now), but also grew the economy (others can make spears now), while creating zero dept. Well, or potentially dept was that I give you some deer meet and you now owe me a spear, which in turn was more productive dept. (Depending if the relationship is Employer/Employee or Investor/Entrepreneur).
Number 3 is where we want to be at, and I'd say is the "idealistic Capitalist model" in a nutshell. It's very important we make sure we remain in #3. The good thing about number 3 is that while it's very possible I remain the richest man, and in fact it might make me richer than even #2 ever would have, since instead of owning all the deers with poor deer production, I now possibly own all deer hunting production, mechanisms, know how, and the whole deer production has become much more efficient, and I can own it's whole process, and maybe even I've now ventured in other things. I've also grown the economy as a whole, and raised the standard for what it means to be the poorest man.
In that perspective, the gap between rich and poor isn't as important as the standard of living. The gap might be bigger than in #2, yet everyone is better off.
But again, if we're slowly shifting to #2 over #3, then it means that I am becoming richer and richer, widening the gap, and everyone's else's lives are just as harsh as ever. We don't want that, we want #3.
This is caused by credit money. When you issue currency based on loans, there's always debt associated. For every dollar saved, more than a dollar of liabilities have to exist somewhere. Where's it go? People in debt (aka the poor).
Until I start hearing arguments on how we can help poorer people actual earn more and take home more of their paycheck rather than force rich people to earn less I know nothing will ever change.
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One thing that needs to be mentioned is how the investments are allocated. It seems to me that many white-collar people are stuck with some very vanilla investments. You can:
- Stick your money in a pension fund managed by some professional. This guy has very little incentive to do anything interesting. But you don't have time to look at a bunch of stocks and bonds, so you'll get index + noise - costs. The big thing here is the manager feels constrained, whoever he is. There's a mandate and you have to stick to it, so be conservative.
- DIY your investments. Probably this means listed equities or indices. If you're a great stock picker, that's great for you, but the money is simply sat in the stock market waiting for your retirement. Listed firms tend to have the opportunity taken out already, mostly.
- Stick your money in a hedge fund. Not everyone is allowed to do this, maybe someone got burned on it in the past. This isn't necessarily much different from option 0, but more leverage and better information might help some of these funds beat the market. As a whole, probably not, but at least you can look at other things than just buy-and-hold some stocks.
- Invest in new businesses. You can certainly pony up the money to start a restaurant or a gym or whatever. People do this, heck I'm doing it, but I don't see it much. I get the sense that we'd be much better served with most people plowing their money into local businesses than the stock market. Skin in the local game. But it's also quite hard to build trust, you need to go through a lot of potential partners to find ones you like. Or get lucky and meet someone.
- Give your money to a VC firm. Back to agency problems. Does the VC have incentives to build businesses? It seems like the incentive these days is to swing for the fences on all the investments and hope some do well. Might work for the VC, but does this work for society? I'm sure there are a number of burned out unicorns that would have been fine as medium-to-large businesses.
- How about PE? Maybe I'm just cynical, but PE seems like extractive financial trickery. Buy a firm, load with debt, pay the PE firm, hope things work out anyway. What happens to the investment? Well it's still gonna be in established firms, often big ones. A lot of that money ends up with management, who will have the same problem that we're thinking about (money from the acquisition incentive burning a hole).
- Invest in firms in other countries. You don't know people or legal systems in other places. Big lemon problem.
- Stick your money in a pension fund managed by some professional. This guy has very little incentive to do anything interesting. But you don't have time to look at a bunch of stocks and bonds, so you'll get index + noise - costs. The big thing here is the manager feels constrained, whoever he is. There's a mandate and you have to stick to it, so be conservative.
- DIY your investments. Probably this means listed equities or indices. If you're a great stock picker, that's great for you, but the money is simply sat in the stock market waiting for your retirement. Listed firms tend to have the opportunity taken out already, mostly.
- Stick your money in a hedge fund. Not everyone is allowed to do this, maybe someone got burned on it in the past. This isn't necessarily much different from option 0, but more leverage and better information might help some of these funds beat the market. As a whole, probably not, but at least you can look at other things than just buy-and-hold some stocks.
- Invest in new businesses. You can certainly pony up the money to start a restaurant or a gym or whatever. People do this, heck I'm doing it, but I don't see it much. I get the sense that we'd be much better served with most people plowing their money into local businesses than the stock market. Skin in the local game. But it's also quite hard to build trust, you need to go through a lot of potential partners to find ones you like. Or get lucky and meet someone.
- Give your money to a VC firm. Back to agency problems. Does the VC have incentives to build businesses? It seems like the incentive these days is to swing for the fences on all the investments and hope some do well. Might work for the VC, but does this work for society? I'm sure there are a number of burned out unicorns that would have been fine as medium-to-large businesses.
- How about PE? Maybe I'm just cynical, but PE seems like extractive financial trickery. Buy a firm, load with debt, pay the PE firm, hope things work out anyway. What happens to the investment? Well it's still gonna be in established firms, often big ones. A lot of that money ends up with management, who will have the same problem that we're thinking about (money from the acquisition incentive burning a hole).
- Invest in firms in other countries. You don't know people or legal systems in other places. Big lemon problem.
This was explained better by Michael Pettis in "The U.S. Trade Deficit Isn’t Caused by Low American Savings", https://carnegieendowment.org/chinafinancialmarkets/77009
> [I]f savings are already plentiful and interest rates are low, to the extent that all desired investment has been funded, U.S. investment wouldn't rise. If the gap between U.S. investment and U.S. savings is unchanged (and investment doesn't rise), then savings cannot rise. This means that policies designed to raise U.S. savings by $20 can only cause savings in one part of the economy to rise by $20 while simultaneously causing savings in another part to decline by exactly the same amount.
The more abstract point is that but for government borrowing (both Federal, state, and municipal) soaking up the glut of cash and redistributing it, unemployment would progressively increase. Pettis' policy argument is that, given this situation (current account deficit driven by foreign dollar holders), government spending should focus on inducing consumption rather than investment as the supply-side of the equation is manifestly maxed out.
> [I]f savings are already plentiful and interest rates are low, to the extent that all desired investment has been funded, U.S. investment wouldn't rise. If the gap between U.S. investment and U.S. savings is unchanged (and investment doesn't rise), then savings cannot rise. This means that policies designed to raise U.S. savings by $20 can only cause savings in one part of the economy to rise by $20 while simultaneously causing savings in another part to decline by exactly the same amount.
The more abstract point is that but for government borrowing (both Federal, state, and municipal) soaking up the glut of cash and redistributing it, unemployment would progressively increase. Pettis' policy argument is that, given this situation (current account deficit driven by foreign dollar holders), government spending should focus on inducing consumption rather than investment as the supply-side of the equation is manifestly maxed out.
There is something fishy about the focus of these two variables: rich savings and poor debt. It assumes a causality when there might be none- especially when these were not controlled/isolated against other variables.
The article also implies that poor mortgage debt might be causing a rise in real state, but fails to consider the manipulated supply and demand of the product itself. More perspective here: https://news.ycombinator.com/item?id=27448175
The article also implies that poor mortgage debt might be causing a rise in real state, but fails to consider the manipulated supply and demand of the product itself. More perspective here: https://news.ycombinator.com/item?id=27448175
Am I understanding this correctly? They are saying that because corporations are saving more, the savings become money that can be loaned to people, and because there is more money to loan, the price of everything goes up, therefore hurting the poor unintentionally? That's pretty interesting.