Low interest rates actually give middle class guy more opportunity because it becomes cheaper to borrow. You can use leverage to increase your position. The most common form of this is a mortgage, but there are many other ways to utilize debt properly as well.
I'm far from an economics expert, pretty novice actually. So I am probably wrong. But as a guy who came from a lower middle class household and has utilized debt & investments to change that significantly I feel like low interest rates have been a huge part of that.
a combination of cheap mortgages, surging home price, surging stock prices, and high-paying professional jobs. You see this all over Reddit on popular Fire subs of ppl in their 20s and 30s with substantial wealth thanks to those four factors.
For people with good incomes and and hence an opportunity to borrow and invest, the past decade has been amazing.
It is the same for everyone else, hence assets get more expensive. It washes out, unless you make riskier and riskier bets to stay ahead of the curve. Some will win, but most will lose.
If one person is making 75k they aren't middle class. 75k might not go very far with kids but in that case their spouse would also likely be working so the household income would be significantly higher than that.
Edit: To be clear, the actual definition of middle class income is much lower as well:
https://www.cnbc.com/2021/07/21/middle-class-calculator.html
> That puts the base salary to be in the middle class just shy of $46,000.
I'm guessing I am getting voted down because a lot of people here think it's difficult to live on 75k, but the reality is that a huge percentage of americans are living on even less, so the difficulty of getting by with kids on 75k doesn't really affect whether an individual making 75k is considered middle class or not.
Middle class is kind of an arbitrary term though. I think working class describes things much more clearly (I work for an employer for a living). And there are plenty of working class people making $75k a year.
Thats true assuming the same scope, like living expenses. It gets a little more nuanced if the person changes the activities in scope. If you're giving billions away in a philanthropic organization that you run (ie Gates), then you've found new utility for that money. So in some ways it has more possible uses, but less pressure to actually use it. But I think your implied point of limited choices for people with lower income/capital is still valid.
I'm simply stating that money does not have fewer uses as one gets more of it. Usually the person's scope changes to include new uses that were not previously possible. The important thing to note is that utility is being used in mixed definition here. Strictly speaking it's definition is happiness or satisfaction. The part about having less use doesn't necessarily match this.
Heck, this exact fact is the very reason why Bill Gates engages in philanthropy. He realizes that other people need the money more than he does.
"Money also has diminishing marginal utility, so as you accumulate more of it, at some point it has less use."
The additional money does not have less use. It's just not going to add as much to quality of life or dictate "life and death". There are still many uses for it, so of which may not be possible with lower amounts.
Yes, $10 buys the same Mcdonald's lunch regardless of how much money one has, but two people, one with $0 and one with $1bn in net worth will be excited about that lunch to very different degrees.
This thread in response to this, to point out that the use of money is not the same as the marginal utility.
"Money also has diminishing marginal utility, so as you accumulate more of it, at some point it has less use."
The additional money does not have less use. It's just not going to add as much to quality of life. There are still many uses for it.
You seem to be interpreting utility in terms of the quantity of things the money can be used for or in terms of the societal benefit that can be obtained from the money, it is not entirely clear.
This thread is in response to this, to point out that the use of money is not the same as the marginal utility. Its mot like having a bunch of money makes it less useful or have fewer uses.
Yes, but as I said above, in this case having use is defined relative to promoting your own satisfaction as a consumer.
I think you are trying to tease apart "utility" vs "use", but to have utility is the property of having use. It's a question of what the utility/use is in reference to, and for economists, that utility is in reference to preference satisfaction by the consumers.
I think, the idea that getting rich does not create a lot of additional joy from diminishing utility is one the best fairy tales ever invented.
It's diminishing marginal utility. Every single comment I've gotten disputing this either misinterprets the word "marginal" or the word "utility", I encourage all of y'all to take an economics course.
Edit: granted, there are a lot of observable situations that do indeed show diminishing marginal utility, but I think the concept is often too much taken at face value when actual data or analysis is scarce and the marginal utility might behave in a more complex way
That said, the empirical evidence is pretty overwhelming in favor of diminishing marginal utility of money, in addition to the fact that it just makes sense. Actual data on this phenomena is not actual as scarce as you seem to be suggesting.
I personally have found that there were times when the marginal utility of my additional wealth was growing as I could suddenly do things I could not do before... (while it other times it almost felt like 0)
In other words: if the diminishing utility axiom were true we could start redistributing now, but one would predict the money owners would be against it.
It's proof by contradiction - everyone knows money is political power.
If something has diminishing *marginal* utility if doesn't follow that a third party has a right to seize it(property rights, different/tangential topic). Therefore this:
> It's proof by contradiction - everyone knows money is political power.
Is an inconsequential conclusion.
Billionaires give away far less of their money compared to the average person:
https://www.msn.com/en-us/money/other/ceo-says-billionaires-...
>Based on these figures, MarketWatch reported Bezos donated just .5 percent of his net worth last year - a quarter of the 2 percent the average American donates each year.
Also, why should money be concentrated in the hands of the ultra-wealthy, does their wealth make them more qualified to decide how it's spent compared to society/government?
https://www.theguardian.com/commentisfree/2020/apr/12/americ...
>First off, the amounts involved are tiny relative to the fortunes behind them. Bezos’s $100m, for example, amounts to about 11 days of his income.
>Well-publicized philanthropy also conveniently distracts attention from how several of these billionaires are endangering their workers and, by extension, the public.
>And why should we believe that Gates or any other billionaire’s “boldness” necessarily reflects society’s values and needs? Oligarchies aren’t the same as democracies.
"Based on these figures, MarketWatch reported Bezos donated just .5 percent of his net worth last year - a quarter of the 2 percent the average American donates each year."
I'm not looking at percent of net worth. Most of the time that is not the "money" that we are talking about here and would not be subject to the utility and use being discussed. For example, the vast majority of Bezos' worth is tied up stock. Also, not every billionaire is the same. Some may not be giving much, but there are many who have pledged to give away the majority of their fortunes.
"Also, why should money be concentrated in the hands of the wealthy, does that make them more qualified to decide how it's spent compared to society/government?"
I've made no claims or mention on this topic.
"Well-publicized philanthropy also conveniently distracts attention from how several of these billionaires are endangering their workers and, by extension, the public."
Again, not part of my discussion. However, I will say that I find this to be untrue when you see articles coming out discussing this very thing (ie your quote).
"Oligarchies aren’t the same as democracies."
Again, off topic. I agree that they are different. I even agree with the implied part about living in an oligarchy. However, that oligarchy in my opinion is more based on if someone is in the ruling class with special privileges and the power to ignore laws when they want (politicians, judges, cops, DAs, etc) than being a billionaire (although money can help influence).
It could be subject to the same utility if we taxed it, that's what I was getting at. Wealthy people aren't using money that society could put to great use.
>Also, not every billionaire is the same. Some may not be giving much, but there are many who have pledged to give away the majority of their fortunes.
Why settle for "some" when we could tax all of them?
"It could be subject to the same utility if we taxed it, that's what I was getting at."
"Wealthy people aren't using money that society could put to great use."
Then you could say that the average person's 401k isn't being used either. But investments are a use of money that do contribute to society in providing capital to businesses and individuals. Gains on those investments are also taxable.
There are plenty of things we could do, but that's not really what we are discussing here.
But the average person has much more marginal utility for their amount of wealth. Going by the average 401k balances here (https://www.investopedia.com/articles/personal-finance/01061...), the marginal utility of dollars $38,401, $160,001, etc is much greater than even millions of dollars at Bezos and Gates level wealth. What else am I missing about utility in this context?
>Gains on those investments are also taxable.
At a much lower rate than income, further cementing the advantages of the ultra-wealthy.
Not while it's invested and locked away in a 401k, according to your comment about it not being used (presumably consumption based):
"Wealthy people aren't using money that society could put to great use." Emphasis mine
"What else am I missing about utility in this context?"
This thread was in response to someone claiming money has less use when you have more of it, which isn't really what marginal utility is about.
"At a much lower rate than income, further cementing the advantages of the ultra-wealthy."
Ok... we aren't really discussing rewriting the tax code.
This is why Bill Gates is still a monster to me. The amount of damage he did through Microsoft over the decades (both corrupting culture so everyone is tied to using MS Windows and the people MSFT economically wiped out) cannot be measured. His after-the-fact giving does not make up for it.
According to statistics on average American household budget, 16% goes to housing. 14% goes to transportation.[1]
So you can say that 30% of your consumption goes directly to land use, because cars need infrastructure and because we refuse high density housing and increased barrier for new housing supply.
Taxes, which is 12%, actually comes a distant second.
Also, with 75K, sounds like you would have ample amount to invest.
https://www.statista.com/statistics/241530/birth-rate-by-fam...
https://www.statista.com/statistics/562541/birth-rate-by-pov...
https://ourworldindata.org/fertility-rate#what-explains-the-...
> Educated, empowered women with access to family planning facilities have less children if they have any children at all
This has nothing to do with wealth inequality. This does have to do with optimizing for wealth accumulation. Possibly something to do with Quality of Life, wherein children used to improve it comparatively, while now they are more of a risk proposition. For people in poverty, they are a (subsidized) source of income, which is unfortunate.
Birthrates are plummeting even for low income households, and I would bet it has something to do with Affordable Care Act of 2010 greatly increasing access to birth control by making it free. From the women I have spoken to, it is almost a no brainer to get an IUD.
https://www.statista.com/statistics/562541/birth-rate-by-pov...
I think societies are about the find out the real price of having babies now that they are not simply a byproduct of sex or women not having power.
Can you expand on that, I'm not sure I follow?
The caveats in the parenthesis are almost unnecessary though, since we are seeing declines in birthrate across all incomes/wealth levels around the world. I think we will see very, very few women choosing to have more than 3 kids, or even 3 kids. I actually only know of 1 couple with 3 kids, everyone else has 0, 1, or 2, and I am in mid 30s.
A relevant number would be the difference between income and the marginal cost per child.
It's incredible recently, and still only in some countries, where children are in the liability area. By and large for all human history, children where a utility. More or less free labor to help support the family.
Depends on location and if you have a family. $75k for a single person in an average area will provide a fair amount to invest. $75k for a family of four in most suburbs is going to be tight. In either case, the value available to invest is substantially less that high net worth individuals and will limit many investment opportunities (private equity, accredited investor status, and likely not making enough to take advantage of mega backdoor Roth).
Aren’t the most dense and transit friendly places also the most expensive (SF, NYC, etc.)?
Trains are very cost effective method of transportation, but it doesn't mean squat if fare is high and demand is overwhelming.
Of course this doesn't cover property tax, sales tax, etc.
This is a handy calculator to calculate effective tax rates:
It really irks me when people do that. They also conveniently leave out items such as the average cost of electricity or gas prices.
A lower middle-class couple with similar circumstances making $50k will pay 12.9% in taxes.
No, its not, its about $65K. Though Google’s Knowledge Graph pulls a snippet about the structurally higher median family income if you search for median household income.
My brother mentioned he was paying around 10% as a single person with a $50k income a few years back.
This is backwards. The point of the article and the GP is to explain why it's expensive. Reason seems to be low rates -> assets inflate. Naturally those assets tend to be in the hands of older/wealthier people.
I for one think near zero interest rates are optimal. As o long as we can ensure there isn't too much irresponsible lending. Liquidity is very important and ensuring people who can make use of the money have easy access to it is very important.
By far the biggest supplier of credit are banks, not private individuals - and their supply is effectively dictated by the Fed.
Central banks are reactive.
The Fed sets interest rate targets, and the intervenes, maasively if necessary, in the market to acheive them.
> If the Fed raised rates 500bps tomorrow, over time, interest rates would still settle back at 0%
The only reason rates are near zero is that the Fed has set its rate target near zero and intervened massively in the market to attain that target. If the Fed raised its rate target and kept it higher, rates would rise and stay higher. When the Fed target, was higher (most of the Fed’s history), interest rates remained higher.
The Fed doesn't set its targets based on what it thinks the market would do without intervention, but based on what it thinks needs to happen to achieve its balance of employment and price stability objectives.
> Central banks are reactive.
You bracket your post, beginning and end with it, but you don't seem to understand that all it means is that Central Bank action goals respond to observed conditions. You act as if it means the Central Bank is impotent to affect conditions, and in particular interest rates, which is clearly false.
So as the 30YT falls, the Fed can do nothing but allow it to fall further.
Wrong. They can set the Fed fund rate target anywhere they want. The same interventions that move the rate the target addresses toward the target also normally move other rates, including various Treasury rates, in the same direction, which is why Fed action on the Ged funds target is usually discussed as action on interest rates, not just the single rate the target nominally applies to.
> Any higher and we get a yield curve inversion and a recession[0].
Yield curve inversions (in any of the Treasury rates, not just the 30-year) are typically viewed as potential recession signals because they reflect an abnormal decoupling of usually-linked behavior representing broad insecurity with the investment opportunities in private markets. They are not viewed as causing recessions, and thus the 30 year Treasury rate is not a constraint on Fed funds targets.
Anywhere they set the Fed fund rate, there will be consequences, of one kind or another. The Fed is trying for the lest-bad set of consequences, and therefore their possible policy is severely constrained.
Sure, the “consequences of doing so” is how they choose where they want to set them.
The upthread suggestion that the 30yr Treasury rate puts an effective cap on target rates because a yield inversion will cause a recession (and, implicitly, Treasury rates are unresponsive to the policies that are used to achieve the Fed funds target) remains false and based on mistaking a symptom with a cause of recessions.
Should the Fed set interest rates arbitrarily? No, but that was not what was being discussed.
The Feds have some scope to nudge the interest rate, but they cannot massively change it against the market. The persistent low rates of the past 2 decades are mostly market driven, because there's been a lack of growth.
The feds try to nudge lower the rates past the "natural" rate (a rate as if they weren't there), but the trend of the rates being down isn't determined by the Feds.
The feds have the ability to influence rates a bit, but not set them directly as they wish.
This blog post summarizes my opinion https://www.themoneyillusion.com/monetary-policy-and-interes...
that's an implicit assumption all rational economists would have. It's like saying the US could just be holding the entire world hostage by threatening to nuke the entire world.
The blogpost you linked is basically confirming that the feds don't have unlimited room for controlling interest rates. they can merely nudge it a bit here and there, and hope for the best.
I like the analogy of the bus driver through the Alps.
Targeting low inflation is price stability and assuming every single central bank targets the same inflation target then you implicitly target a specific exchange rate (with some fluctuations). If you set the interest rate arbitrarily people flee the currency and break the implicit peg which can manifest itself as inflation.
I am unsure why you think that 0% is the natural rate for rates (I'm assuming you mean real as the alternative misunderstanding is even worse). People prefer to have money now rather than money later.
According to the Friedman Rule 0% interest is an ideal interest rate assuming no inflation or deflation. However, what ideal really means in practice and whether we can actually have no inflation is still unknown.
First, the "price of money," is not set by markets if by "price of money" we mean interest rates. Interest rates are set by a central bank, which is a monopoly. IE, only the ECB can make euros. Only the Fed can make dollars. Exchange rates are set by the market, but the interest rate is a decision made in a boardroom. Money is not a commodity, like other commodities. It's price (interest rates) is not determined by supply and demand. It's determined by monopoly price setting.
Pegged currencies work the opposite way. CBs set the exchange rate, but they can't control interest rates. You could make the argument that the "price of money" is represented by exchange rates in the former, interest rates in the latter. But semantics aside, I think it's important to start with a recognition that CBs set interest rates as they see fit in most major currency markets today. Fed interest rates are not market determined.
This is also (a not unrelated) thing that has changed since 1980. There was also a shift from pegged and semi-pegged currencies to floating exchange rates.
Second, interest rates are not the actual return on savings in most cases. Most "savings" are in assets. Pension portfolios, private wealth funds, real estate, etc. These are the returns that "justify forgoing consumption," not interest rates. Returns on such investments have been high in recent years. CB interest rates translate relatively directly into the cost of borrowing, and the cost of repaying old debts. Interest rates do not determine the return on savings.
Third, and this is where Thomas Picketty makes his controversial points... there is not much give in the "money now vs money later" market. For the most part, ordinary people spend their income. Wealthy people save/invest their money. When wages rise, the volume or price of goods may rise. When investment returns rise, the value of assets rise and inequality is increased. Regardless of profits, losses, taxes or such, Bezos' lifestyle will not change. Only the value of his assets will change. At the extreme end, poor people spend all their money and have no assets. Rich people save all their money and have negligible spending.
The fact that market returns, the real "savings rate" have been high has not, on average, encouraged middle class guy to save more.
That said, if you aren't already, you may interested in Hayek. His most famous work is all about interest rates as prices, and choosing between money now and money later. I disagree, at least in regards to 2021, but he was a clear writer and worth looking up.
Only partly. One of the points the author makes is that central bank interest rates, while conceptually set arbitrarily "in a boardroom", are constrained to a narrow range by market realities, and attempts by "the boardroom" to set interest rates outside this range result in various forms of economic dysfunction that central banks try hard to avoid.
> Returns on such investments have been high in recent years. CB interest rates translate relatively directly into the cost of borrowing, and the cost of repaying old debts. Interest rates do not determine the return on savings.
Yes and no. We've been in a bull market for so long that people such as yourself have begun to think of investments as simply savings with high yield. You're neglecting to account for risk. CB interest rates set the risk-free savings rate. Of course you can get higher returns by taking more risk, and for most people, taking a bit of risk is the right thing to do.
I realize this is controversial, and many economists still disagree. I do think that wind is blowing in my direction though.
IMO, this is Monetarism's big mistake. Now that floating exchange rates are the norm, this becomes more clear. Interest rates are not constrained to a narrow range by market realities. CBs can set them to 0%, as we now see. They could set them to 1000% if they chose, since CBs can print arbitrary sums to pay interest.
Interest rates have consequences in the economy, but not restrictions. Those exist in a pegged currency world, not in floating exchange world. If depositors don't want to own CB bonds, they can redeem them for dollars/euros. The CB will always have dollars/euros available to make good on that.
The alternative is free banking and it is unlikely to work with a shared currency. Each bank would need to issue its own currency.
> Interest rates do not determine the return on savings.
Technically a high interest rate competes with investments for capital. It means someone is borrowing money at high interest and wants you to make enough room in the economy for that investment. The interest isn't the return, it's the compensation for the inconvenience of delaying spending. If the interest rate is higher than what solvent borrowers would pay then the interest rate on bank accounts directly competes with investments for capital. An investor getting 5% on a bank account will not spend the money on an investment that returns 4%. The absurdity of this choice is that if there are no borrowers at 5% interest no investments will actually be made. The investor is creating a hole in the economy for no reason.
I believe technology is the primary culprit. Think of something like WhatsApp, which Facebook bought for about $20 billion and would be worth who-knows-how-much today. I think WhatsApp had like 70 employees, a couple founders, only took a small amount of capital, and yet created $20 billion of value in a company in just a few years. Go back a couple decades when technology couldn't scale like it can today, what would it take to create a $20 billion company? How many years, how many employees, how many suppliers, how many customers, how much capital, etc etc. Instead, it was like three guys who each made $7 billion or whatever. This word "scale" is really just code for concentration, as in, a company can grow without having to spread the wealth around, it can instead accumulate to a relatively small group of highly intelligent and creative people. Technology enables that top echelon of people to keep more for themselves.
So, I would say technology in a general sense is really what's driving wealth concentration. The long-term persistency of declining rates and increasing wealth concentration tell us it has to be structural, and I'm not sure what else can explain it. But, people are often uncomfortable with this, because it's not fixable. High taxes don't fix it over time, because we can keep replaying that game over and over again and the smartest will just keep winning and amassing a disproportionate share of the wealth created.
Question - which guy with $100million - the one with it all in cash, or the one who owns a company that is “worth” $100million ? Those are two very different people.
Think about two people, one extremely wealthy, one middle class. The middle class guy making $75k probably has to spend all his money for consumption: food, rent, car, etc. There's little left over for saving or investing. In order for that guy to justify forgoing consumption and instead saving it, he requires a high interest rate, otherwise it's not worth it. But what about the guy worth $100 million? He can't spend it all on consumption, so he has to save a lot of it. Ah, but what's his opportunity cost? Zero. He has no choice, and the money he'll earn from interest won't even get spent anyway. So, two people, two very different marginal costs.
The world is just one giant pool of capital. Over the last four decades, as capital has shifted from being more evenly spread out amongst people with high marginal costs to a smaller group of people with marginal costs of zero, interest rates keep falling...the majority of capital now resides amongst people who can't spend it all and are happy to earn any real rate of return.