FTA:
"The logical case for why the Fed’s activities cause wealth concentration is that low interest rates and high levels of QE tend to boost asset prices, such as stocks and real estate, which are primarily owned by the wealthy. By making homes and stocks more expensive and unaffordable, it widens the wealth gap between those who owned those assets before the Fed began its QE vs those who were not yet significant asset holders when this occurred. There are other more nuanced arguments, but let’s start with that one, because that’s the main one.
If that’s the case, and QE is indeed a powerful force for wealth concentration, we should see that the nations that have the lowest interest rates and that have performed the most QE relative to their GDP, have the highest levels of wealth inequality, right?
In reality, we find the opposite.
...
The regions that did the most QE relative to their GDP, and that have had lower interest rates for longer, have less wealth inequality, not more, as measured by the ratio of the mean wealth divided by the median wealth.
If the prior theory was true, we should have seen the opposite. More of a correlation, rather than an inverse correlation.
...
I’m not making the argument that QE reduces wealth concentration, because that’s not the case either. Instead the point is, it’s complicated. QE and interest rates by themselves are significantly uncorrelated (or even inversely correlated) variables vs how much wealth concentration a country has, when comparing between countries.
That is an uncommon view, but that’s simply how the math works out. Clearly we need to look at the nuances."
There is a reason most of the farmer uprisings in the early US were over wanting more inflation rather than deflationary policy that made the value of their debt payments higher.
inflation is "good" for debts if your budget is otherwise balanced and your income rises apace, but if either is not the case inflation will only depress purchasing power.
historical farmer revolts were interested in higher inflation because they had land, a real asset, and sold crops, real commodities, that provided appropriate income. modern poor people generally have zero assets.
Rates are relative, looser money absolutely translates to lower rates, even for poor people. Claiming otherwise is (social) science denial.
> modern poor people generally have zero assets.
Poor and lower class people are often deeply in debt. Many poor people will even have homes with very large mortgages outstanding, and without a route to paying it down. The median black person in Boston, for instance, (not to conflate race and poverty, it is just an illustrative statistic that comes to mind) has $8 to their name. That does not mean they literally only have $8 in a wallet somewhere, but it does mean half of those people are underwater in debt. This is before you even start looking at mortgages. I'm assuming that is not unique to Boston.
That is actually very analogous to the situation we are finding ourselves in. Tighter policy would increase the real value of the payments that poor people have to make on their homes, etc.
Pay check to pay check can mean literally that. Money comes in, money goes out. There is no buffer. UDP not TCP life :D.
This hypothesis presumes that loans are priced exclusively based on cost.
However, all products and services are priced based on willingness to pay, and profit is the delta between cost of delivering it and what customers are willing to pay.
Price gouging runs rampant on credit cards because they are designed to gouge their users. The credit card adoption and payment customer experiences are extremely smooth and free from any resistance to the point where you can pretty much find yourself with a new credit card in your pocket without knowing how. However, avoiding charges and interest payments is extremely hard by design, specially when compared with debit cards. Customers cannot escape these charges, and with low income customers they syphon a relatively large portion of the little disposable income they have.
But you are right that poor assets or debts are not enough to explain how interests rates are supposed to help or hurt them. The idea is very roughly that lower interest rates unlock investment which causes them to have jobs.
The traditional first approximation is regular people live entirely off income and have no meaningful assets or debts, and rich people don't work and just have assets and debts, live off profits/dividends, or even just loans with their appreciating assets as collateral. It is "class as calculus" as I wrote more about in another comment.
Let's be honest here, this is just a neoliberal fantasy that amounts to a liberal equivalent of trickle-down:. Enrich the rich and the $ (via "jobs") will make it magically to the Lower classes.
The rates for those are still lower than they otherwise would be.
It's interesting how even as formal christianity is in decline, the moral constructs that it popularized (distaste for usury, protestant emphasis on liberty over well-being) morph into new forms.
There, you've just committed the sin of collecting 14,000% APR.
You can't compare payday loans to things like mortgage rates or bond returns. It's a market, but it's a very different niche. It's like comparing the cost of mineral water at the grocery star to the cost per gallon of your tap water.
the rate always maxes out the legislated cap. so it's not really dependent.
The best thing is:
a) UBI, just hand out a tiny bit of money to make poor people more liquid, because liquidity kills, not insolvency
b) postal banking, because even shittier than a payday loan is high fee check cashing without a pretense of debt!
Poor people hopefully at the point can save up a paychecks worth of buffer in their bank account, and don't need postal bank loans to replay payday loans.
If you asked people 20 years ago they would say compounding interest that massively exceeds inflation is evil. Nowadays people are worried about low interest being a problem because of their wholly incomplete model of economics that doesn't even address unavoidable natural monopolies like location.
The land market is inherently inefficient. That fact was papered over by high interest rates. Instead of paying the landlord huge sums, you paid the banks huge sums. Now that interest isn't going to the banks it's going to the landlord again.
The solution is obvious. Tax monopoly rights with a pigovian tax. The mythical free market in consumer goods only exists because of well written property laws. The mythical free market in land doesn't exist because the existing property laws are written extremely poorly.
We need people to be financially educated. We teach calculus in schools but very little on finance. Perhaps that's changed since I was in high school, but for me, it was non-existent.
If we want people to be more "creative" we should achieve that with firstly with more leisure team for hobbies. No faux-entrepreneurship hustle culture. No trying to "acculture the poor" with extrinsic rewards, when rich kids have the luxury of not having the intrinsic rewards beaten out of them. Let people have hobbies. Let people involve their neighbors and pool their UBIs for the bigger-scale ones. Let no one need debt to survive.
We should go "common core" on calculus. The essence to understanding economics right is stocks vs flows, and even if people never learn "this method of solving integrals, they should be able to see a graphed function, and draw it's rough derivative and integral. It's an essential skill. They should also know how to ride bikes and kinesthetically learn this stuff on hills. It is an essential toolkit of thinking, no symbols or formalism needed or wanted.
I know the mantra of our financial system that creating debt also creates opportunity, but that is certainly detached from reality if used to form a general rule. For a average Joe, debt is exclusively bad. For states? They have more possibilities. But at that point we are talking about completely different forms of debt.
...only if inflation rates are on the way up (ie. higher than expected). on the way down (ie. inflation is lower than expected), they lose out.
https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf
> Using a sample of 19 advanced economies spanning over 30 years, I find no empirical evidence that dynamics move in the way Piketty suggests. Results are robust to several alternative estimates of r-g.
https://www.economist.com/briefing/2019/11/28/economists-are...
http://davidsplinter.com/AutenSplinter-Tax_Data_and_Inequali...
> Top income share estimates based only on individual tax returns, such as Piketty and Saez (2003), are biased by tax-base changes, major social changes, and missing income sources. Addressing these issues requires numerous assumptions, especially for broadening income beyond that reported on tax returns. This paper shows the effects of adjusting for technical tax issues and the sensitivity to alternative assumptions for distributing missing income sources. Our results suggest that top income shares are lower than other tax-based estimates, and since the early 1960s, increasing government transfers and tax progressivity resulted in little change in after-tax top income shares.
> Piketty's response[55] noted, however, that Góes used measures of income inequality rather than wealth inequality, and inappropriately took the interest rate on sovereign debt as his index of the rate of return on capital, which makes his results not commensurate with those of Piketty's study.
* https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Ce...
[55] FR: https://www.lesechos.fr/2016/09/thomas-piketty-repond-a-letu...
In your simple example (25% returns annualised) he's only 31 years ahead!
Don't you just feel better now?
$1000 * (1.07 ^ 30) = 7,612.25
$1,000,000 * (1.07 ^ 30) = 7,612,255.04
Proportionally, It's still 1000:1. So we see compounding doesn't change the relative difference. But now we're getting to absolute gap that's simply uncoverable by wage income, unless you can land in the professional management class, which effectively sets its own wages (board members voting for compensation packages for one another).
Sure, they often don't but the reason they don't has little to do with QE. After all, the entire point of QE and monetary stimulus in general is central banks are concerned that not enough jobs are being created and real wage cuts and layoffs will result. And in that scenario where credit is expensive and businesses are looking at layoffs, our wealthy investor is still getting 7% returns, just from offering expensive short term credit to struggling businesses rather than seeing the long term shareholder value of thriving businesses rise. But the worker is even further from catching them up, because they're struggling to find a job.
Most people only need to build a $2-3M pot to be financially independent, be able to stop working, and still live better than most working Americans, which is the biggest quality of life improvement there is in acquiring wealth.
The utility of wealth falls off a cliff pretty quickly. Replacing a $200K/yr salary from passive income in perpetuity with a good level of certainty would require a pot of $6-7M
At 7% (above inflation), most people still need to spend 30 years saving 30% of their salary before they can reach a level (30x) that can replace it. 15% over 40 years also works.
Person A: $1,000 * 25% growth = $1,250
Person B: $1,000,000 * 25% growth = $1,250,000
Originally, the wealth gap between A and B was 1000:1. It remains 1000:1 after the asset appreciation. However, because wage income has long been stagnant, it becomes increasingly difficult for the poorer person to play catch up, because labor income can't scale in the way capital can. Both the proportional change and real change are worth considering when it comes to setting public policy.