When I was in college, the bank would give something like 6-7% on savings. If I had a million dollars in the bank I could comfortably live off that interest for life. Now if I put a million dollars in the bank, I lose wealth due to inflation, so I'm incentivized to put it in a fund or something now, which is a lot riskier than bank interest.
What were inflation rates while savings rates were 6-7%?
>lose value to inflation
Inflation always erodes money of course, so there was never a time when that didn't happen when there was inflation.
At 3% inflation, that $70K/yr would lose half its purchasing value in the span of 24 years of your retirement. (It also would cease yielding $50-70K per year over that time as well, but that’s with the benefit of hindsight and you could lock in the rate with a longer term CD at retirement. That still leaves you with half the purchasing power though.)
I don’t think savings accounts have ever been a reasonable way to invest the bulk of your money for future retirement.
Related, my dad and a buddy invested $10k in a CD that yielded 21% back in 1984 I think. If the rates are high enough CDs can be an excellent investment. They’re basically risk free. My bank is offering 0.6% currently. Real rates are very negative right now.
In order to leave purchasing power untouched, you need to grow the account by the nominal inflation rate and leave that for next year (especially in the context of having “a comfortable living situation then and today” over a near-30-year period.)
https://www.putnam.com/literature/pdf/II514-59fb3e978431513e...
As someone who's never bought bonds before, how do I know the 7.12% won't change after the 6 months of the locked rate to the 0.00% and whatever pittance they decide to toss my way in an attempt to account for inflation?
Sincere question, I don't know anything about anything.
https://treasurydirect.gov/indiv/research/indepth/ibonds/res...
That's the coupon rate paid by a bond bought at that time (in the late 90s the bonds paid a real return of 3%, which when added to the current 7.12% inflation rate gives a nominal return of 10.12% for the next 6-months).
The rate of those bonds was 3.5% just a month ago, and historically averages around 2%.
source? yields top out at 2.05% right now. https://www.treasury.gov/resource-center/data-chart-center/i...
I do wish savings accounts still had high interest rates and there wasn't so much incentive to invest in riskier assets like stocks.
Yes, people investing in productive enterprise is actually better for real output, prices, and generally overall welfare.
And college debt holders, mortgage holders, generally impoverished people would rather have lower rates on the debt that they have.
They'd also rather have jobs, which again comes with more investment.
They'd also like to have a higher quality of life, again which comes with more investment in capital/production/real output.
Generally impoverished people aren't granted lower rates because of the credit system. They typically pay usury rates. Only people with existing assets / collateral get low rates.
>They'd also rather have jobs, which again comes with more investment.
Generally impoverished people have shit jobs, that's why they are generally impoverished. Also, investment leads to automation and offshoring which actually lowers jobs.
>They'd also like to have a higher quality of life, again which comes with more investment in capital/production/real output.
If investment in capital/production/real output helps impoverished people, it's very little. It generally helps already wealthy people.
You're looking at stuff from a textbook macroeconomic position. In the realistic / microeconomic world, things aren't as you are portraying them.
2. Unexpectedly lower interest rates increase employer competition in the labor market, raising wages. This is well studied.
3. The quality of life of a poor person in the US is unimaginably better than that of someone ranked relatively the same 100 years ago. That is due to investment.
Denying those massive quality life improvements is absurd, although increasingly popular in our out-of-touch political climate.
Why would lower rates lead to increased competition for labor? Or higher wages?
Increased wages follow increases in productivity. I can see lower rates spurring businesses to invest in equipment that would increase productivity, but the experience over the past decade has been quite the opposite: productivity growth has slowed despite historically low rates.
Loans to business, home loans, etc. Education loans really weren't a big thing because education used to be subsidized. Also, poor people aren't the only source of ROI on loans. They're quite lucrative though because they seldom are able to pay the principal and are an endless source of interest payments.
2. Unexpectedly lower interest rates increase employer competition in the labor market, raising wages. This is well studied.
Yet wages have been largely stagnant for 40 years, how do you account for that? Got links?
https://www.epi.org/publication/charting-wage-stagnation/
3. The quality of life of a poor person in the US is unimaginably better than that of someone ranked relatively the same 100 years ago.
I'm interested in how you are measuring this. Got any links? How about the quality of life from someone 40 years ago before neoliberalism?
>Denying those massive quality life improvements is absurd
Which quality of life improvements are you referring to? Are you being intentionally vague? I mean we can buy cheap plastic crap from China, but that's at the expense of US manufacturing jobs, isn't it? Food certainly isn't cheaper. Healthcare and housing isn't either. So yes, if you believe buying cheap disposable stuff from overseas is a massive quality of life improvement, then ok. Take a stroll down middle America and tell me how good they have it. I know lots of towns with boarded up main streets because all the manufacturing went overseas. That's where the investment went.
Again, you're quoting macroeconomic theory when microeconomic conditions on the ground subvert any gains in macroeconomic theory.
How does investment drive up wages when labor investment is say 90% overseas or automation?
Take care, believe what you want I guess.
Like I've met people who could actually give a convincing argument that cars haven't necessarily been the unambiguous tradeoff many believe them to be throw knock on effects in infrastructure and planning.
However, there is also the qualitative look at things as well. Numbers in absolute magnitude we're lower back then, so maybe there's something psychological at work with the larger numbers. There was also a smaller population, lower hanging fruit, the attraction of some level of unknown.
The thing I find most interesting in these disengagements is that they always occur right before people come to terms with "oh, I have to actually lay out my priors." Which is generally, in my experience, where the root of every fundamental misunderstanding is to be found.
For example, farmers with land in 1919 could at least live off it and make a living and feed a family off say 40 acres. Many farmers had their own land and would subsequently start losing it in the 1920s-today due to increase efficiency of farming which requires more land to make the same amount of money. I would argue farmers certainly were better off in 1919 than today, at least in terms of net income.
Now, today, that same family doesn't own land, is probably living in an apartment working for a company that is looking for ways to be more efficient through automation and outsourcing. It's very possible they are struggling to feed their family off a single income, so they have to have dual income. It's very possible one or both lose their job for an extended period of time due to market fluctuation. It's very possible they lose their apartment. I would argue that if that family had 40 acres in 1919, they wouldn't be as dependent on someone else for their livelihood, if nothing else, and could at least feed themselves. Any ability to feed themselves today if all that happened would be due to government programs, not market investment.
Generally when people say "people are better off now ...", they are talking about technology. For example indoor plumbing and electric. Everyone has it now and it's relatively cheap. Back then it was a luxury. So as far as that goes, I would say people have it better today than in 1919. Perhaps not the average poor person on Skid Row who doesn't benefit from indoor plumbing or electricity. I would argue that the proliferation of indoor plumbing and electricity was more government spending / investment than market investment though.
Computers weren't a thing back then, so that doesn't really apply. Again back to agricultural efficiency, computers harmed the average/poor farmer and only helped the large land owners.
Also keep in mind a lot of people were farmers in 1919.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
It's important that people delay consumption so that there is enough room for investments but european countries are running well below capacity. Savings mostly affects inflation rather than the nominal amount of money that can be lent out.
> better [...] prices, and generally overall welfare.
How does investment do that? Plenty examples of the opposite can be found. I find those claims baseless.
Investment also shifts aggregate supply to the right, which causes more output.
I know this is Economics 101, but is there any evidence that this actually happens in practice?
When interest rates go down, house prices tend to climb proportionately as more people take advantage of the lower mortgage rates. The same goes for cars to a lesser degree. So unless you buy a house at the very beginning of an interest rate transition (before the market has settled), the rate won't have as drastic an effect on your monthly payment as you're making it seem. You can also refinance later if you buy when rates are high, but you can't lower your principal.
Also, interest rates affect other types of investments that people carry, such as retirement accounts.
I don't know what the cumulative effect of all of this is, though, so I won't claim that your overall point is incorrect.
The real estate market is inefficient by design (look at Californian zoning). If you made it just as efficient as other consumer goods the problem would be gone. The problem isn't interest rates. It's the inability of the market to respond to them. In theory lower interest would just mean bigger and more dense construction as taller buildings become easier to finance.
In practice people figured out that if they do "sound zoning" the increased amount of money will flow in a handful of pockets. The same is true with "sound money" where the value the economy produces grows as the population grows and becomes more productive while the amount of money stays the same and therefore benefits hoarders.
The boring answer is a land value tax.
Even if you're a first time buyer affected by the price rise, you're better off with a high monthly payment to own a higher value house than a high monthly payment to transfer more interest to people who are wealthier than you.
Obviously this is just an approximation, but "class is calculus" is a very useful mental model.
By that ones, yes, the vast majority of people have negligible liquid savings. So the interest rate doesn't directly matter. Yet, the rich also "own the means of production" --- i.e. real assets, which also doesn't get inflated away. So it doesn't obviously matter for them. So what does it effect?
The essential original Keynesian insight (what most of the factions since might agree on), is that since the point of owning things in Capitalism as money, even if you aren't holding cash, the interest rate effects how easy it is to invest, but also what investments are productive w.r.t doing nothing. This spooky shit is what is supposed to give monetary policy it's power.
The differences in opinion in those factions come down to whether there is always enough to invest in, and access to credit is the limiting factor, or not. The Post-Keysnians would say relying on monetary policy alone is stupid, because (to distill in a parable) if no one can buy your stuff, it doesn't matter how cheap the factor is it's not worth it. That's when directly employing people (jobs guarantee) or handing out helicopter money can make a difference --- it's "root" demand, not some spooky shit effecting supply.
Back to the calculus stuff, an interesting idea is https://en.wikipedia.org/wiki/Demurrage. This is "inflation for stocks not flows". In short, we want money at rest to go bad, so rich people and instutions are forced to spend and we don't grind to a halt via the paradox of thrift. But we don't want people's wages to inflate away, because they certainly cannot bargain hard enough to get enough raise to keep up. Demurrage is wonderfully hamfisted in trying to do the former but not the latter --- money at rest becomes less money, money flows retain their purchasing power.
This money-sucker beaurocracy stuff makes for more sense with e.g. CIA selling drugs rumors than taxation. This isn't some bullion-based monarchy we live in.
This isn't some bullion-based monarchy where you can just debase the silver currency with some copper to deal with your monetary problems.
Be careful this is a dangerous notion: with today's form of fiat concurrency there is net 0 money!
> redistribution
Likewise the "re" is sketchy. The state can pull money in, and take it out. Keeping those balanced because metal bullion skeuomorphisms is confusing. Our insistence that all money is debt is "double entry accounting fetishism" and also needlessly confusing.
Distribution is good. "re" implies some sort of 0 sum, when the fact that the nominal need not be zero sum, and the future us uncertain and full of possibilities, and this is the true beauty of Capitalism we should embrace even as we are sanguine about all the terrible parts.
The methodology in https://www.gc.cuny.edu/CUNY_GC/media/LISCenter/pkrugman/ler... is much better. The state can print money. The state can destroy money. The state can issue securities. The state should not subscribe to any theory a priori, but simply do the simplest thing the achieve agreed-upon goals, and avoid agreed-upon bad things. Theory can be developed afresh, and with far better empiricism, by basing it on actual experiments of the state trying out different levers and seeing what happens.
Only a wealth of practical experience will overcome the highly politicized disputes. We will never achieve consensus while tiny gamut of the policy space is explored.
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That is my long-winded way of saying I (think I agree) agree, but please find a different way to say it :).
And as for redistribution, I suppose just “printing” money into peoples account would more or less have the intended effect as well. I do suspect a 10% inflation rate would lead to simple logistics costs as the nominal amounts kept changing.
But yes, if only more policy was evidence based…
[1] https://assets.kpmg/content/dam/kpmg/is/pdf/2016/09/KPMG-Mon...
The median savings account balance is just $5,300[1]. And the thing about savings accounts is that they generally do get spent down periodically - they typically aren't used to continuously squirrel away cash for decades, so you're not compounding interest over the long term. You might save for 5 years and then do a big spend-down to purchase a car, a house, home repair, medical emergency, etc.
So, if the savings interest rate is a paltry 1%, that's just $35. But if it were 5%, it's $265 -- Except now you're paying 1-2 points more on a mortgage, student, and/or car loan. The median household debt is something like $59,000: roughly 10x the amount in savings.
So, you make $230 more in savings interest at the cost of thousands of additional interest payments.
Reducing QE and making debt more expensive seems to benefit a very narrow group of individuals who have the means to store large amounts of cash in safe liquid assets and don't carry significant debts relative to their income. Everyone else is worse off.
[1]https://advisorsmith.com/data/average-savings-account-balanc...