If the US returned to a 1950s style tax system or enacted very high wealth taxes this problem could be avoided, but the forces arrayed against you for proposing such reforms would mean political suicide for anyone who does it.
Which makes me think that the problem will get worse until some sort of structural break occurs (at which point, as with 2008, it'll probably get worse at an accelerated rate with a cure worse than the disease).
No. Just like the student loan crisis, when you make borrowing money really easy it drives prices up. Home prices vary inversely with interest rates. Student tuition well that's even worse because the risk to the bank is zero (because the government is backing those loans).
Unfortunately some people think they can spend their way out of problems without making worse problems - I'm looking at congress here.
As they say, when you're in a hole the first thing you need to do is STOP DIGGING. For personal finance this involves cutting up credit cards so you can't go further into debt. For the loans they need to stop talking about the government paying them off (or some of them) and STOP guaranteeing them - then we can talk about the people who are already fucked. For everything else we need the Fed to increase interest rates to a good 3 percent or so. Yeah that will tank the economy short term, but I say so what it's already going to crash lets get through the pain and straighten things out.
Of course it does. However, the net result of lowering interest rates is just that the middle class pays through the nose for assets (housing) instead of for money (debt service).
The parasite sucks the same money from a different location.
Wealth inequality with high interest rates and with low interest rates are two sides of a very similar coin.
The only real fix is to tax the rich.
This is unrelated to housing, but you have the order backwards. Prices went up, and students took out loans to pay them. The root cause of the increases in higher ed tuition is dis-investment in higher education by state legislatures, not increases in expenditures by colleges. Given that most colleges are state-run or non-profits, they can't just increase prices and dump the proceeds into profits; they have to spend the money they bring in, and I have yet to see any evidence that universities are spending 100% more (or any large number that scales with the recent increases in tuition) on a real per-full-time-student-equivalent basis.
https://fivethirtyeight.com/features/fancy-dorms-arent-the-m...
The school I went to in the 90's has been on a massive building spree the last 20 years. Many large new buildings. The number of students has nearly doubled in the same time so it's not a complete waste. They even built a new clock tower with funding from some rich donor.
The net effect would be the same. It doesnt restructure everybody's relationship to capital it just restructures the form in which capital gets hoarded and deployed.
A high interest rate with high wealth inequality just means that the wealthy suck wealth from the middle classes by lending out money instead of renting out property.
Either way you're still getting screwed it's just the delivery method that changes.
Monetary policy was necessary. Only lower interest rates for the poor, not for the wealthy or for institutions with assets.
This includes tech exploitation of 'users' who can't kick the tech habits from their life because they are designed to be addictive or essential.
Let's introduce some facts.
1. The inflation-adjusted cost in $/square-foot of a house in the United States remains unchanged from the 1970s according to BLS data. Wages kept pace with inflation (but not productivity). Okay, so why are houses more expensive then? [1]
2. New homes have on average twice the square footage that they did in the 1970s and this is particularly felt outside of urban areas. This is due to zoning rules, setback rules, minimum size rules, etc.
3. Since the 1970s, major metros have significantly restricted new development. San Francisco built less than half the homes needed to sustain the increase in demand over the same period. [3] This is managed through punitive zoning rules and obstinate city councils.
Houses in places people want to be became way more expensive because supply was not allowed to grow to meet demand. Houses outside of these urban areas are now twice as big. Housing is expensive because Americans believe housing should be an investment first - and the goal of an investment is to become less affordable over time.
You cannot have something be both a good investment and affordable. You must pick a lane.
We know it's not what's happening in housing because Japan has basically the same monetary policy, and the same low interest rates - and has tripled their M2 money supply since 1990. But their CPI and their cost of housing remain dead-ass flat for thirty years. Because they have federal zoning rules that allow supply to meet demand. Look at this graph. [2]
Your cause is noble but you're pointed in the wrong direction, Quixote.
> We are watching the looting of the american citizen in real time, communism/collectivism is once again the wolf in sheeps clothing.
We in this case is not the Fed (properly capitalized this way btw) it's city councils. And that's not communism, if anything it's feudalism.
[1] https://fee.org/articles/new-homes-today-have-twice-the-squa...
[2] https://fred.stlouisfed.org/series/JPNCPIHOUQINMEI
[3] https://en.wikipedia.org/wiki/San_Francisco_housing_shortage
It's very true if you are lucky (or smart, depending on who you ask) with the location it can be an incredible investment. But there are many neighborhoods where houses barely increase or even decrease in value as well (relative to inflation).
If you compare it to the S&P 500 over the past 2 decades as well it probably fares far worse.
I understand in certain markets if one is diligent they can be quite profitable as a real estate investor. That is not what I am talking about - I mean the median U.S. home. That's not quite as strong of a case for investment. I'd suggest most buy a home for lifestyle first, and maybe at best a forced savings account second.
But huge congrats to those living in areas which have seen incredible growth! Just understand it's not the norm.
Now what happened this past year is rather peculiar and it's going to be interesting to see how that unfolds.
This isn't actually relevant because mortgage interest, minus tax credits, is well below inflation. The base case on a 30 year fixed is that you end up ahead just by having the loan.
> That is not what I am talking about - I mean the median U.S. home. That's not quite as strong of a case for investment. I'd suggest most buy a home for lifestyle first, and maybe at best a forced savings account second.
I'm not sure there is a "median US home" because it's super multi-modal. There's an urban homes, suburban homes and exurban/rural homes. Each will have a different risk/reward profile.
> Now what happened this past year is rather peculiar and it's going to be interesting to see how that unfolds.
Indeed.
By the way, all this is to say, I also do not think that buying a home a guaranteed win by any stretch. You have maintenance/upkeep costs, insurance costs, potentially HOA dues. You lose a lot of flexibility. And potentially most importantly, you lose out on the opportunity cost associated with your down payment. Plus, you have a lot more risk if the market moves against you. Returns are never guaranteed even if you're in a historically appreciating market.
There's some great calculators that cover all this to tell you if you should rent or own - and in my early 20s, the calculator rightly said I should not own, even though I was in an appreciating area. [1]
[1] https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
The ones that stand out as having the most liberal zoning rules see the lowest increases in housing prices.
> People dont understand, when you make the interest rate on money so low, people can borrow billions and throw it into new assets, running the cost up on those assets.
People understand that very well: it's the fundamental reason for lowering interest rates, to encourage economic activity. Sometimes you need more economic activity, sometimes you need less.
Now this argument wouldn't apply if it was possible for the average person to borrow money directly from the central bank at the same near-zero interest rate the banks pay, but that isn't the case.
> An 18th century French banker and philosopher named Richard Cantillon noticed an early version of this phenomenon in a book he wrote called ‘An Essay on Economic Theory.’ His basic theory was that who benefits when the state prints a bunch of money is based on the institutional setup of that state. In the 18th century, this meant that the closer you were to the king and the wealthy, the more you benefitted, and the further away you were, the more you were harmed. Money, in other words, is not neutral. This general observation, that money printing has distributional consequences that operate through the price system, is known as the “Cantillon Effect.” [1]
1: https://mattstoller.substack.com/p/the-cantillon-effect-why-...
Any time you take out a mortgage (at well below inflation by the way) you are obtaining new money "from the printer." The same is true any time you take out a loan.
This whole cantillon effect business is trotted out and flogged each time we mention economics on here but as far as I can tell, nobody has ever even attempted to quantify the impact of the cantillon effect.
> If I counterfeit a billion dollars and go out and spend it all, I've got more stuff and everyone else is a little bit poorer. If the central bank prints a bunch of money and lends it to its buddies in the finance industry for near-zero interest rates, they get more stuff and everyone else gets a little poorer.
This isn't actually true. Japan tripled its M2 money supply since 1990 but both CPI and housing CPI remain dead-ass flat. This model is way too simplistic. Which is why it was thrown out alongside the rest of Austrian economics.
Things that seem intuitive aren't always right.
This is an incredibly basic, fundamental fact, and your omission of it in your analysis is telling.
Debt at 3% against an asset will on average net 4% return just due to 7% inflation
So massively leveraging against a home is extremely beneficial as it is the closest the poor and middle class can get to taking advantage of our monetary system.
So, it's not about the poor being debtors or holding currency, but that their debt is at higher rates, in smaller amounts, and typically acquired for everyday needs instead of assets.
I mean, I'm willing to entertain the possibility that they are, but despite that claim's popularity in these threads, that claim can't be the reason for it.
If there was no inflation, there would be no inherent profit from taking out a large loan.
From my comment above the math is 7% inflation minus 3% interest rate equals 4% profit just from taking the loan.
That's the problem.
It's not just that the poor can't start a business or buy an asset, it's that debt itself is incentivized, and those that are wealthy get the best access to that debt.
Our current monetary system then exacerbates that as the lower the interest rate, the higher the inflation.
Thus the looser the monetary policy, the greater the incentive to take out debt, the less the poor and middle class have access to debt.
Further, this all compounds into inflated asset prices for basic needs like housing.
Only if you are a spherical cow that intends to live forever.
Most people value money now more than money later. Money now lets you buy things you need, today. If you expect your earning power to increase (which happens for most people without inflation to one respect or another), but you need the asset today (a car to get to work, a house to live in), you'd still want to borrow money.
> It's not just that the poor can't start a business or buy an asset, it's that debt itself is incentivized, and those that are wealthy get the best access to that debt.
Yes, that's one major driving factor for inequality.
> Our current monetary system then exacerbates that as the lower the interest rate, the higher the inflation.
Okay, that's a far more persuasive argument than 'Bob's $500 savings account lost 2% of its value this year.' And it does hold true for asset inflation, as asset prices take a few years to normalize to, say, a P/E ~inversely proportional to the prime interest rate.
But once they do normalize, why do you expect asset price inflation to continue?
For sure, but you'd be met with market rates that tame your desire for money now. Buying a car on credit is a lot less tempting at 20% interest than 4%. Right now used car prices are going up and it's easy to get low interest financing.
Used cars are not supposed to go up in value. It's madness.
> But once they do normalize, why do you expect asset price inflation to continue?
I expect asset prices to continue to inflate as long as we continue with our current monetary policies.
I expect us to continue with our current monetary polices because the US would be unable to service its debts in about decade otherwise.
That's due to a demand spike and supply shortage. Blame bitcoin and video games and people not wanting to take public transit in the middle of a global pandemic. It's not because of monetary policy, or because Scrooge McDuck borrowed a trillion dollars for free to buy up a bunch of used cars, or because GOOGL doubled in value in two years.
> I expect asset prices to continue to inflate as long as we continue with our current monetary policies.
Why? If it didn't make sense to invest money at a P/E ratio of X at a Y%-for-you interest rate, why would you invest money at a P/E ratio worse than ~2X, at a Y/2%-for-you interest rate?
I get that the process of going from X to ~2X is painful, but why wouldn't it stop there?
The more the Fed distorts normal market signals, like interest rates, the less efficiently capital is allocated, and so the wealth distribution morphs from one that roughly represents human skill at allocating capital to an extremely top-heavy skewed chart that rewards incumbents.
Exactly! Thank you.
Simple explanations are usually far more useful than ideological and narrative driven ones.
2. A wealth tax would be hard / impossible to implement.
The net effect was the same. Putting an effective cap on income throttles wealth inequality growth.
>A wealth tax would be hard / impossible to implement
It absolutely would be. Any political effort to do so would be sabotaged every step of the way by institutions dedicated to protecting enormous agglomerations of private wealth.
Moreover, closer it got to the finish line the more willing American oligarchs would be to flirt with political violence and ally with and organize the underlying, disorganized currents of fascism in order to keep their wealth.
This is a path we've been along before, almost 100 years ago.
However, the US middle class was more willing to organize and fight to protect its interests back then. There were actual communists among them and the US government was legitimately afraid enough to kowtow to their demands every so often. Not any more.
It’s also operationally almost impossible to implement, as what counts as ‘wealth’ is highly ambiguous, and in most cases valuing it even in the best situation is nearly impossible. In a taxation situation even more so because it isn’t changing control between disinterested parties, so there is no one who has the time to really look at and form their own opinion and holding anyone accountable to it on a short timeframe.
A lot of the trump real estate scandals are from him (supposedly) manipulating real estate appraisals for favorable loan and tax purposes, and that is for something with relatively easy/straightforward/understood valuation and an army of appraisers.
Private equity? Partnerships in ongoing concerns? Controlling vs non-controlling interests in various things? Trusts?
There are so many valid ways to look at, account for, and structure these - and they all have wildly different values, levers to change those values, and short or long term valuations and cash flows. If you own a controlling interest in a large business, but don’t sell anything and don’t have income from it (you reinvest it in the business), that may or may not be a lot of wealth. If the business tanks without it, was the business worth anything? Or was it worth something and then it was another factor that killed it? If the business is producing a lot of cash and the owner pulls it out, that is clear measurable income and easy to quantity.
To the point if you threw 5 independent evaluators at any of them you’re probably going to get 7 different actual numbers, all meaningfully different, and all of which could be argued are legitimate.
If the wealth tax goes after real estate, folks just won’t put their name on it directly and voila, good luck.
This is also despite those alleged shenanigans being hamhanded and pretty obviously done and by probably the most well know and controversial ‘wealthy person’ in current society, enforcement still not only didn’t work, it still hasn’t actually been enforced. And is surrounded by massive controversy and legal BS and will probably drag on for another decade.
It’s like pointing to OJ Simpson’s murder trial as an example of swift and non-controversial justice that supports your legal policy?
Therefore, a wealth tax would either raise money or discourage a form a fraud. It's a win either way.
The "impossible to do" is a common excuse for people just not wanting to do something.
The common excuse is that the ultra wealthy aren't actually cash wealthy. They have all their wealth in investments that are rarely if ever actually realized. People throw their hands up in the air and say we can't tax unrealized wealth. But how do wealthy people get cash? They borrow millions, hundreds of millions, or even billions against their unrealized wealth. So limit or tax their borrowing of this money such that it forces the realization of wealth, which would be taxed, or they are taxed on what they borrow, respectively.
If you do not recognize unrealized losses, it strongly biases investment toward low-risk rent-seeking investments because the expected return is much higher than long-term high-risk investments under this tax regime. Startups, biotech, etc become unattractive as a place to put money because the financials don't make sense relative to rent-seeking and investment is not a charity. Paying taxes on non-liquid assets is a massive risk for average people, greatly reducing the practical investment opportunities available to them.
If you do properly recognize unrealized losses, it creates a scalable new mechanism for tax avoidance that would reduce tax revenues. Not only are valuations strictly notional and effectively fictional for many assets, but intangibles are often entangled in asset values that can't be accounted for in a sane way (e.g. the act of transferring an asset can greatly reduce its value ipso facto). These intrinsic logical inconsistencies allow almost any tax story to be constructed using assets.
While no government wants to deal with the consequences of broadly recognizing unrealized losses, they also don't want to incentivize all investment to go into low-risk rent-seeking endeavors like real estate instead of long-term high-risk investments in technology and innovation. It is a damned if you do, damned if you don't, so governments generally opt out of this type of tax altogether.
The wealth inequality problem in the U.S. is INSANE. If the U.S. had a population of just 10,000,000, literally 12 people would have as much wealth as the bottom 60%, i.e., 6,000,000 people, combined. And yet, here we are talking about how "impossible" it is to simply tax wealthy people.
These systems were made by humans. They can be fixed. Wealth inequality and taxation of the wealthy are not laws of nature that can't be changed.
Interesting idea. We sort of already do this, we apply property taxes based on the value of the property as pegged at purchase (re-assessed over time). We could exempt loans on collateral already subject to property (or other value-based) taxes, but could then put a wealth tax on any other asset used as collateral for a loan at the collateral value agreed on by the lender.
What do you think property taxes are?
I agree it would be really hard to tax all forms of wealth. But I'm fine with rich people hiding their wealth in artwork or stamps or whatever to save it from taxation. Keeps the money out of useful assets like stocks and houses.
Property taxes are a common type of use tax.
(There is debate on this point; I personally find the side arguing that such a tax would not be barred as needing to use fairly tortured lines of reasoning to arrive at their conclusion.) If you can’t pass a wealth tax federally, then whatever state wanted to compete on having a low/zero wealth tax would find plenty of wealthy takers as residents.
How does stock have utility anything like housing?
If you are purely an investor then the utility of equities vs. real estate is the same -- it is an investment.
This is the standard excuse for stopping any thoughts of changes in the US. Let's not even think about improvements because they are impossible anyway. A sane health care system is impossible, doing something about rising wealth inequality isn't possible, reducing opioid deaths is impossible. The only things that seem possible are things to move even more money into the hands of wealthy people. I still remember how in 2008 Congress quickly was able to produce 750 billion when the banks and the banker's money was threatened.
So you had a strong incentive to increase salaries, hire more workers, invest in more machinery, diversify, etc. simply because getting more cash out of a business wasn't worth it
Unfortunately they focused on increasing executive salaries and forgot about the rest.
"
It's also a culture thing. Companies used to accept some level of social responsibility outside of making money. The shareholder value over everything else since the 80s broke social contracts and made it ok for wealthy people to only look after themselves.
I think we have to get back to a place where it's shameful for companies to lay off people while making record profits and paying bonuses to execs.
Even in city, land isn't that expensive outside the coasts. It's building up to code, while being restricted into what your zoning locks in, while maintaining all the permits and paying year after year of property tax.
There are two problems... first is, that "back then" you could build (almost) whatever, wherever, and people built stuff, now with NIMBY-ism and regulations, you can't anymore.
The second problem (the larger one) is, that what was once a thing you bought, because you needed one, and sold, because you moved somewhere else, is now an investment... noone invests in cars, in pasta, nor in pretty much anything that degrades with time.... somehow the housing market got so bubbled up, that it's worth it to buy a house, and instead of prices going down as it ages, the prices actually go up. Limiting investments or limiting number of houses a person can own, would solve a lot of those problems.
Of if consumers bought 1950 style houses there would be no problem, since they're incredibly cheap.
Massive increases in the stuff people want in a house over the past half century have driven prices more than anything. Triple or quadruple the area, expect triple or quadruple the inflation adjusted cost. And that is the majority of the cost increase.
It’ll revert to the mean. Even if it’s greater than g due to an exceptional investor like Warren Buffet, eventually his heirs will take over, and they are likely not as good as he is. It is profoundly hard and unusual to keep a family rich for many generations.
The reversion to mean will probably happen as a result of a violent structural break, though, not as a gradual reversal.
This means economic or political crisis. And, the same people who were made so fantastically rich from r > g will likely be the ones deciding what to do about it.
It's not like governments will wake up from their stupor and implement a basic income. Whatever happens (fascism, war, financial crisis), it'll likely make us wish for the good old days of right here and now.
I'm almost more afraid of the structural break than I am the inexorable rise of wealth inequality.
Thomas Piketty would like to have a word with you.
https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Ce...
https://marginalrevolution.com/marginalrevolution/2014/05/wh...
Your link is somebody arguing that perhaps the data doesnt look so bad if you squint at it in the right light.
It's not a refutation. it's not even a rebuttal. It's basically disapproving FUD - "oh well if you pretend the 2008 housing bubble never happened things dont look quite so bad...". Um, ok?
There's even a little plea at the end for the reader to "understand that this is all very complicated and hard to understand". How scientific.
Of course, it is quite complicated sometimes and when he tries to break it down himself he gets himself in knots trying to defend inequality: https://www.nakedcapitalism.com/2012/11/desperate-effort-by-...
Subsequently empirical research has found that Piketty's conclusions are extremely sensitive to the way he slices the historical data and the modeling parameters. At best that's evidence of an incompetent econometrician who doesn't understand the tools enough to perform the required robustness checks. At worse, it's evidence of data snooping to shoehorn the the results into a pre-determined hypothesis.
But you don't have to take my word for it. The IMF itself performed an exhaustive robustness check and found that Piketty's conclusions simply don't hold up:
With government intervention, this can last for as long as the government lasts.
Governments are subject to math, even if it takes a while for the numbers to add up to a problem.
Inequality doesnt really have an inbuilt limit as such and we are still a way off people owning entire countries, which wouldnt be without historical precedent.
But it can last for a really long time, and if something lasts for more than your lifetime, do you really care that it's finite.
However, it probably wouldnt be the most effective way of extracting that wealth. A lot of families would try to restructure their holdings to convert income into unrealized capital gains and try to wait a few decades until the tax could be brought down again.
For what it's worth, people have studied this a lot. While it's true that bad choices can get you in financial trouble, it doesn't seem to be true that most people who are are financial difficultly got there due to poor choices.
It contributes, but on the whole a) it's way more complicated than that and (b) the general narrative around this stuff has very poor SNR.
In general "I did [path dependent thing] and so did my friends, so anyone should be able to" isn't a very good argument for nearly anything. It works as a solid existence proof, but has little to no value for anything else - too much selection bias and path dependence".
Note that previous works regardless of the negative/positive aspects of what you are claiming. Literally none of us have a good idea of how things work in general based only on observation of our own lives and those we know. To get anywhere real on this you have to go vastly broader (i.e. study real data, but first fight the uphill battle to figure out if you can get any that isn't fatally compromised). It's hard work.
Another point is that in general, unless you know someone incredibly well and intimately, your observations of them are by nature pretty weak. Drawing strong conclusions from any of it a dicey proposition.
It was caused by economic parasites, not choices.
I know a fair number of people who inherited property and do almost no productive work.
They live lavish lifestyles and live almost entirely off the hard work of others while their wealth - the result of the hard work of others - both grows and sustains them.
I know a fair few others who are worth to society far in excess of what they are paid and have very little left of that once bills from monopolies, rent and taxes are accounted for.
At some point this system breaks down completely.
https://datausa.io/profile/cip/cultural-gender-studies
The idea that genders studies degrees are to blame seems a bit like blaming avocado toast to me.
This is one of the stupidest comments I've ever read in my many years here. You're the walking epitome of privilege and survivorship bias.
Of course you don't see any poor workers, you live among rich people. You have literally no knowledge on why others may struggle. Do you think those 99% of people worse off than you all are lazy and dumb? Really?
I grew up poor and have plenty of money now so maybe I just have a more unique perspective that's difficult to have without living it. But I often find so many really just want to tow the narrative because they understand how much inequality really works and so long as they're doing better than most, the can continue to do fairly well as long as no one rocks the boat. They like hiring that person to do that thing for virtually nothing. They like all the services they get for marginal costs because the people who work there are being exploited. As long as it's not in their face as as long as they can br the lords and vassels of today, they get to enjoy enough of the spoils of human exploitation to ignore all the terrible ways we treat each other through financial abstractions.
So much success or lack there of has little to nothing to do with work ethic, value creation, or contribution to society and has so much more to do with gaming the current systems.
Only when folks are faced with how such a reality affects them, such as when a company lays them off and they have little marketable skills after toiling away in a throwaway job for 10 years, do they actually give any real consideration to how others live - because they now are facing the same sort of conditions and giant concrete roadblocks.
The people who are truly broke don't have the option of choosing between a history degree and plumber training. They grow up in broken homes with parents working 3 part time jobs because no one will give them benefits. The benefit cliffs prevent their parents from jumping up in social status.
"The only people I see are struggling are the ones who have made dumb choices" is naive at best, dismissive, callous, and uncaring at worst.
People with college degrees aren't the ones losing the wealth battle. Rather than looking around your circumstances, we should look at data [1]:
Education Level Median wealth
No high school diploma $20,780
High school diploma $73,890
Some college $89,280
College degree $308,800
[1] https://www.forbes.com/advisor/investing/average-net-worth/
1) how many people with the unmarketable degrees work in completely different fields, and would be much better off studying in that field from the beginning
2) how much more money certain majors make. Most doctors have a net worth over a million. Most art majors - not even close.
If we want to improve the wealth inequality, we should start pushing young people to what society actually demands, not the "you can be whatever you want" nonsense.
There is no majors for people who get into high-paying jobs like "Sales" or "Real Estate Broker". I also know the most successful people in those industries tend to have college degrees. People with those interests can use their college experience to make themselves more well-rounded humans. They can build their networks and improve future earning potential. They can focus on other disciplines (writing, marketing, pre-law, etc.) to make them more successful in their chosen career.
> how much more money certain majors make.
It sounds like you were surprised when you saw your initial example of a "dumb choice" major, Gender Studies, had an average wage over $80k; which is more than double the national median. Your second example International Relations, has an average wage of $97k [2].
Maybe it is your frame of reference that needs change rather than other people's major choices.
[1] https://datausa.io/profile/cip/cultural-gender-studies
[2] https://datausa.io/profile/cip/international-relations-affai...
What a miss. Teenagers being handed checks for 100K+ to study topics that wont get them a job is the fault of the... teenager? Maybe we should focus on outcomes from colleges instead of enrollments. Maybe high schooler guidance considers should actually help students discover career paths? Maybe financial institution shouldnt give teenagers unforgivable loans they will never be able to pay back? Maybe as a society we shouldnt set the standard that one has to and needs to go to college by and large to be successful?
There are a whole slew of things that cause wealth inequality but blaming it on someone taking a check to study a subject that doesnt translate to a real world job is so low on the list of concerns it shouldnt even be a part of the conversation.
Who else is responsible for their choice? They make the choice, nobody else. That 100K check doesn't force them to choose a particular degree.
I wish we had mandatory annual counseling for students that would inform them of the market demands. But again, at 18 you can just Google that info in 30 seconds.
If we are already deciding what people under the age of 21 can do we should probably add giving someone a unforgivable loan that could put them in debt for life to that list.
Also I'd argue that googling for 30 seconds to determine your future career is just as stupid as taking a check and figuring it out as you go.
It’s nice your life has been so easy. Really. But please don’t use your rose-tinted glasses to accuse everyone else of being “dumb” - aside from how pretentious it comes off, it’s a wholly incorrect view. Does it factor in covid-related job loss? Inflation? Anything other than your dated experiences that no longer apply?
The icing on ththe cake is that you responded to someone else calling them “dishonest.”
Sure, but where does that get us? What can we do about it? In the long run education should, one hopes, help. But given that wealth inequality is likely to be a feature of all but the most smurfy of societies, how do we want to manage it in ours?
(According to legend, the creator of the Smurfs was a staunch Communist and he designed the Smurfs to be a model Communist society. Supposedly the Smurfs are a kind of revenge for being denied entry to some nation or other for his political beliefs. I swear I 'm not making this up. The smurfs are ruled by a red father, they each are defined by their profession or main talent, they "give according to their ability and receive according to their need" without any money or economic system, and the guy who is their nemesis wants to eat them or turn them into gold. Oh and they have no women at first, and then they have one woman and her job is "woman". I don't know if that last part is particularly communist, but it's pretty messed up if you think about it. "Smurfs don't lay eggs! I won't tell you that again!")
It is definitely a huge problem if you don't continue your education into higher value areas, but I don't think getting one of those degrees is necessarily a 'dumb choice'
There are plenty of people with non technical degrees who do well in this world too, propped up by unpopped malinvestment.
House prices have certainly risen substantially in the last few years [1]. But if the FED is to blame, why has the same thing happened in the UK [2], Germany [3] and Australia [4] ?
[1] https://fred.stlouisfed.org/series/QUSR628BIS
[2] https://fred.stlouisfed.org/series/QGBN628BIS
They've also been more aggressive about taxing real estate investment (they leaned their lesson in the 80s) and their zoning laws aren't captured by local busybodies.
More housing units per person. Also Japan did not have a lot of nimby mentality blocking new housing, to my knowledge
Lower rates offsets the price reduction to a certain extent.
The Kansai region has an increasing population and real estate prices are still in decline or stable.
Also Japan did not have a lot of nimby mentality blocking new housing, to my knowledge
Yes, they did - prior to 2001 when the national government took zoning authority away from municipalities.
https://fred.stlouisfed.org/series/QJPN628BIS
If a growing region is declining, I would expect building to be outpacing growth, or a cultural trend away from wanting to own (reduction in demand for purchasing despite growing population)
For example, UK has at most $87B of foreign currency reserves, a fraction of which is USD. [1]
UK has 9.2T in privately owned homes [2]. So reserve currency can back at best a tiny, likely sub percent, of all home loan amounts.
And, this is the kicker, the UK does not hold reserve currency to loan to anyone. It's an assert they hold at the national level.
So cost increases there (and other countries listed above) are not the result of US being a reserve currency. Don't make up wild claims.
[1] https://assets.publishing.service.gov.uk/government/uploads/...
[2] https://www.mansionglobal.com/articles/u-k-home-values-have-...
Does artificially created demand in the US allow more consumption of commodities which inflates the price of home building in other countries?
Do artificially inflated US asset prices produce a wealth effect in other countries if people in those countries hold those assets?
I'm not sure what UK reserve holdings have to do with my comment but I don't know, I'm just some guy on the internet.
Your first comment started with "The USD is the world's reserve currency".
Do you know what reserve currency means?
> A reserve currency is a large quantity of currency maintained by central banks and other major financial institutions to prepare for investments, transactions, and international debt obligations, or to influence their domestic exchange rate. A large percentage of commodities, such as gold and oil, are priced in the reserve currency, causing other countries to hold this currency to pay for these goods.
So I don't know, maybe I was focusing on how commodities are priced in the USD. Have a great day!
When people make stuff up they feel is related, but do not check if it is actually relevant or possible, or even really understand the terms, then double down, it derails the discussion. It's not "in the spirit" of the discussion.
>So I don't know, maybe I was focusing on how commodities are priced in the USD.
Which foreign housing markets price their houses in USD? You replied to a comment about houses in UK, Germany, and Australia, none of which do.
Did you notice not a one of the many reasons a country holds a reserve currency is to make loans for local housing stock be more available? No? Read it again.
Pick a country, like I did the UK. Show the size of their USD holdings relative to their housing stock loans. Tell me again how such absolutely tiny ratios are relevant to the availability of loans. I showed one case where the relative sizes of the numbers makes it absolutely silly to claim their related. But since you made the first claim, and it on face value seems completely nonsense, then you provide some correlation or peer reviewed paper or whatever you think makes availability of loans in the foreign countries the OP mentioned tied to the face that USD is a reserve currency, and not more to simply local or global economic conditions, unrelated to the fact that USD is (but one) of reserve currencies.
I get you're likely Dunning Krueger and know nothing about finance or central banking or how housing markets work. Or you could admit you don't know and didn't know there is a relation or not and you simply threw two terms you knew little about, then when called on it, got upset.
But go ahead, and show me the link you claimed to start this with. Good luck.
Not if there’s a supply shortage. If there is a supply shortage then that necessarily means that some people will be priced out without corresponding downward price movement.
10 people, 5 houses, the market-clearing price is the 5th highest price any of the people are willing to pay. Remove the 5 people on the low end and that’s still the market-clearing price.
The equilibriating force of price increases causing demand to drop causing downward price pressure only keeps prices in equilibrium around the market-clearing price. Supply shortages shift the supply curve and cause the market-clearing price itself to move. The equilibriating force that should address this is that increased prices should incentivize new supply to be created from sources that were previously uneconomical, but the supply shortage exists because of legal restrictions that distort the market.
1.1 housing units per household. Same as year 2000. But you're right that local areas could have worse ratios.
It's time to break up the mergers.
Also the fed printed tooooons of money besides the $600. The $600 is the only bit that ended up directly in citizen's hands.
"Corporation X is raising prices 10% due to inflation."
headline next quarter:
"Corporation X announces 10% profit margin growth despite inflation pressures."
This is happening every day now. Corporate profits are at record highs across the economy. It's hard to take them seriously when they are crying about workers demanding raises and increases in raw materials when they are posting the largest profit margins in history.
https://www.reuters.com/business/investors-watch-us-companie...
My local pizzeria had their best 2 years ever during the pandemic, yet they still raised their prices this year due to labor and supply cost. I can't really fault them for not wanting to lose a bunch of money this year to somehow make up for that.
Primarily on corporate balance sheets, paid to investors via dividends, buybacks etc. Of course also used to hire new workers and so on.
The point being handing somebody money in a one time transfer only helps them in the immediate term but the inflationary impacts actually harm them longer term.
I would venture to guess most of the stimulus money ended up in pockets of already wealthy asset holders at the end of the day.
What it comes down to, is really which inflation numbers you believe, as the numbers really run the gamut as well as their causes if you really dig into the reports and the details. If inflation only looks high due to used cars being wildly expensive these days due to the chip shortage vs inflation causing cheap staple goods to increase in price, then that'll change your conclusion of inflation's effects.
Still, if we want a stimulus to go places other than corporations and CEOs then we need to dramatically rework how the economy works, including food distribution, and de-corporatization and strict limits on CEO pay.
This whole inflationary disaster could have been avoided while still pursuing a compassionate policy response. There was no logical thinking in the level of fiscal handouts done.
Larry Summers did a presentation in Feb 2021 before the ARP was even passed predicting why it would cause inflation, due to the stimulus far exceeding lost wages.
You can find it on YouTube, but he empirically walks through why the magnitude of the package was a bad idea
The PPP had its own set of problems and was widely abused.
https://www.richmondfed.org/publications/research/economic_b...
Companies and people are greedy all the time, that's the fundamental basis of capitalism. Capitalism is an acceptance of this and regulations to shape around actors working in their own self interest.
Are companies more greedy now than they were in 2019? No
An opt in moralism based economy will never work and has been tried and failed many times.
That wasn't a claim.
> Companies and people are greedy all the time, that's the fundamental basis of capitalism.
Oversimplification.
> An opt in moralism based economy will never work and has been tried and failed many times.
This wasn't suggested.
Your comment is vapid, in case you're wondering.
And if my comment is vapid, yours seems a tier below. You've said nothing other than a personal attack.
In the 70s they tried price controls to curb "corporate greed" and it led to mass shortages.
How about use some brainpower to refute something I've said rather than insult? Do you have any critical thought?
> Clearly the comment above is suggesting corporate greed is partly contributing to cost pressures.
Inflation is not related to greed, regardless if you want to say that astrology influences your lottery results. So no. You can be frustrated about it all you like. Good luck with that.
We’ve had over a decade of cheap money creating asset price inflation and exacerbating inequality, not to mention the total collapse of the home building for several years and the exodus of qualified talent from that period drained much needed supply from the market.
All of this happening while the largest generation since the baby boom entered prime home buying age.
This has been a 15 year trend. It didn’t start yesterday and it won’t end for a long time.
Fiscal policy should be used to address economic gaps, not distortion through monetary policy. Of course, very hard to achieve alignment and consensus in the US political system.
Despite the inflation, it's pretty clear the recovery after 2008 could have been much more rapid with greater fiscal injections.
The Fed should be an algorithm IMO. Way too politically influenced.
In a lot of ways, the feds hands are tied by the political dysfunction in our political branches. They’re just putzing along, trying to plug the holes in a leaky ship.
It's not so much that the Fed’s “hands are tied” preventing them from monetary policy they should, as a central bank, take. Rather, Congress just isn't taking fiscal policy actions that they, as the government outside of the central bank, should take, and (in some cases, especially on the Right) blaming the Fed for for their own nonfeasance.
I mean the Fed didn't even flinch at all in 2021 as all asset valuations reached bubble territory. Real estate appreciated faster than anytime in history. This becomes a real liability down the line if normalization of policy is ever needed. Bubbles can be disastrous to the economy longer term.
They removed the moral hazard of risk taking for the past decade or so.
The policy response to 2008 has shown that next to nothing is going to happen on the fiscal side (though this did change in response to COVID, hopefully this is a positive sign), so the fed has been backed into a corner without a whole lot of room to run.
When a major swing happens, if they do nothing, then it’s “the fed let a recession happen!!!”
Instead they addressed the acute crisis, and continued the same policy for 2 years with no change.
What they should have done was 6 months or so after peak covid panic, start to normalize interest rates and QE. They also didn't consider at all the velocity of the economy and just looked at point in time employment numbers to drive their policy thinking.
It was clear the job market was already overheated at 5% unemployment, for example, due to the historical number of job openings and increasing pace of those job openings, plus record high quits rate. Plus retail sales/inflation.
“Markets” you are discussing aren't part of the Fed dual (actually, triple) mandate, and are of only intermediate, instrumental relevance.
> Fiscal policy should be used to address economic gaps,
Yeah, but Congress has been basically asleep at the switch on fiscal policy for a long time, and to the effect their failures effect the things that are part of the Fed mandate, it is legally the Fed’s job to act via monetary policy, whether or not fiscal rather than monetary policy is the better choice.
If they didn't care about markets, they would have ended QE abruptly, and started raising rates months ago. They only avoided doing this to prevent a market selloff. Every rational thinking person thinks it's absurd for them to be buying MBS when housing is appreciating at record levels amid an inflationary environment.
They spend a lot of time talking about market expectations, market levels in their notes.
They also have a price stability mandate that they've ignored for over a year.
I didn't say that, though.
I contextualized the role of those prices as intermediate and instrumental rather than ultimate goals (and, as such, they are targeted for what, in consideration of other circumstances, they appear to indicate about the things that are mandate goals.)
So if your supposition is correct, they should engineer a decline in the market and real estate to achieve their price stability mandate.
Yet everything they do is dragging their feet to support asset prices. So I agree with your assessment in theory, but don't see them living or acting by that logic.
They could have ended QE overnight in January, for example. Why not?
They continue to pursue low volatility when the times of today warrant higher volatility and less risk taking/speculation.
Probably because no one has confidence enough in any model of the effects of such a large change to base policy on it short of a much more glaring problem than any the Fed is actually facing. The combination of unwinding QE over the period between the last meeting and mid-March and the predicted 25-50 basis point rate hike in mid-March is actually the Fed pumping the brakes on the economy really hard.
The obvious reason they didn't do it is because they knew markets would decline 5-10% on the surprise. Which would actually aid them by curbing risk taking/speculation, raising the cost of borrowing.
I do think Powell is motivated by his reappointment, so that's also playing into his inaction. It's just backfired at this point.
We are clearly entering a wage price spiral. Wages rose an annualized 9% last month. To suggest even a 50 bp hike would put us anywhere close to aggressive tightening is just not true. The traditional thinking is that interest rates must exceed rate of inflation to be in a tightening policy regime.
The Fed pushed job market past the natural rate of unemployment, and now the only way out is a hiking induced recession.
Yet instead of trying to cut off this possibility early, they'll slowly plod along until it's inevitable. There was probably a chance to short circuit the spiral a few months ago.
I suspect Jerome Powell will be looked back on as a disaster. That Biden renominated him out of deference to the political norms that were broken to get him in place is a massive black mark on his record.
What do you want the Fed to do? If they make money more expensive then mortgages become less affordable and housing prices slump, but if they make money easier to get then housing prices go up. Meanwhile, the Fed's mandates are maximum employment at sustainable inflation - not home ownership. The cost of housing has been dominated by local and state regulations for quite some time, it's not something the Fed can or should fix.
What that means is that last year you could have bought a $300k home for $15k in cash and pay around $2k in mortgage/taxes/insurance. The real problems are that there were so few $300k homes and the vast majority of Americans don't have $15k for a downpayment. The Fed can't fix those problems.
If you want to point a finger, point it at municipalities and who don't care about home ownership rates. They could make holding single family homes as long term investment properties unaffordable tomorrow, but choose not to. They could encourage new home construction, but they don't.
(side note, "Fed" is not an acronym, it's an abbreviation for the Federal Reserve)
I had to scroll distressingly far to see this post. The record set was going from ~13% investor bought to ~15%. It's a marginal change. Prices sky rocketed because, as you noted, (1) it was/is one of the best financial environments for home buying ever and (2) Covid accelerated timelines for home buying.
The problem is that half of Americans don't have more than a thousand dollars in the bank, and we need to focus less on the sheer cost of homes (when homes were incredibly affordable) and more on why Americans can't save for down payments.
How do I find these loans? My partner and I are looking to buy our first home soon and have been agonizing over whether or not to go for a lower down payment % at the cost of higher monthly payments, or a higher down payment % at the cost of not being able to afford much for our area (where 500k is about the minimum for a house)
But I'm not a financial advisor so don't listen to me, I'm just some dude on the internet. Those loans are gone, since interest rates are continuing to climb and that trend will continue for years.
It is not strictly a monetary problem but you are close. It is a allocation of money problem.
When the FED increases supply of money and/or lowers interest rates, people think that this will help the poorest get on the debt and get themselves going.
But reality is that it is the rich (and institutions) that have assets good enough for collateralization. Which means that in a low interest rate environment the rich (and institutions) can borrow MUCH MORE than the poor, more easily.
It plays out very simply. Banks literally salivate at lending to the rich in a low interest rate environment because the counterparty risk is super low. Just take the free money. With poor people the counterparty risk does not disappear with low interest rates.
Over decades, the rich (or institutions) keep getting richer with the same mechanism.
It's a misallocation. When the FED reduces rates, the rate reduction should not allow the rich to borrow at lower rates. The inequality is spiraling out of control at this point.
Wrong.
This was a deliberate and planned response to protect their true stake holders from the liquidity crunch that COVID lockdowns almost unleashed. Asset owners. For all intents and purposes it worked extremelly well.
https://www.barrons.com/articles/blackrock-is-biggest-benefi...
https://www.forbes.com/sites/sergeiklebnikov/2022/02/11/two-...
https://www.forbes.com/sites/moneyshow/2020/02/25/moral-haza...
Nothing incompetent about it. This is moral hazard in action and has been the bull case for some time now. Fundamentals don't matter anymore because anytime the market gets rickety its been a safe bet that either the Fed will swoop in with more QE and low interest rates or the federal government will issue more bailouts.
Risk is socialized while gains are privatized.
Really the most concerning aspect is that the cost to build new housing has drastically gone up. We are at an all time housing deficit. I don’t see how that corrects itself unless we get to the point where building a new house is cheaper than buying an existing house.
Any idea why? This is a life plan for my wife and I, we're currently looking for the right spot of land (~10 acres) and then we hope to start building in ~5 years after significant saving and planning.
We're in the initial stages of planning out our floor plan/etc, and costs are high, but we haven't really noticed a huge difference between building and buying. .. but i suppose we also aren't far enough long that we're getting real price estimates either.
While the post is worth a read, the TLDR is that there are multiple issues, each of which could seemingly independently be the source of the increase.
Basically, from a finance perspective:
Cost to borrow money (for an institutional investor) and buy a house with that money generates a return. Meaning they can buy these homes up all day long and make a profit.
Because of these facts, I don't see this trend of investors gobbling up SFHs to be sustainable. I suspect most of them are in this for a quick buck, and will quickly dump these homes the minute it becomes obvious that this was a dumb idea.
I live in LA and I think about this a lot when I see the only homes for sale here going for $3-4+ million. How much longer can this continue?
On the other hand I know that we are overtaxing the world's resources and short of some massive changes in our system many middle class folks in the western world are going to see a drop in their quality of life as globalization continues and our living standards average out with those of people in developing nations.
Those things are scalable -- LA's light rail network is one of the biggest in the country and it's incredible efficient. Over a million people (of a city of 4 million) use LA Metro on a daily basis.
There's no reason LA's fundamental character as a city would change if we allowed duplexes in already dense neighborhoods or as much BRT as possible. But instead we've prioritized voices like the Bel-Air Homeowners Association or some NIMBY idiots in Santa Monica to make policy decisions and are stuck with environmental review on projects that demolish, say, 4 parking spots to build 40 affordable housing units.
In other words it will no longer be the same LA, but rather LAtropolis .. so gp is right about the physical limits.
No one is coming for existing single-family homes -- they can peacefully co-exist alongside properties that house 5x the amount of people.
It's been clear to Fed observers that they've pursued a policy driven with asset pricing front of mind.
The horror here is that we have artificially limited house building and at the same time encouraged the population to treat it as an asset class.
We treat residential real estate like crypto-bros treat their NFTs.
California (and all states) need to build massive amounts of housing (any kind! public, social, market-rate, affordable -- it doesn't matter just do all of it at once) to address the immediate demand while we also work on destroying the concept of housing as an asset and not a guaranteed right.
This is uncontrolled capitalism imo. When the rich have such buying power that they own governments, as they do now, you can't really call it communism now can you? The government is just an arm of the rich now, and nothing will change until that is brought into check. Getting rid of government wouldn't stop the rich either.
I don't know what in the eyes of cop is supposed to be communist about the current US social structure. I see (from the outside) modern feudalism and a social structure that, despite a simulation of democracy, is closer to European industrialization and its industrial barons and their working precariat than to a modern, democratic and fair society.
In the US, anything you think is bad is "communism/Marxism" if you're on the political right, and "unrestrained capitalism" if you're on the political left. Don't fall into the trap of thinking there's any logic behind any of this.
The solution is balance. I'm a capitalist, but unrestrained capitalism is difficult to impossible. Unrestricted government or capitalism will fail in both cases imo.
Hopefully the recent data will force the rich bastards who run the fed to stop putting themselves and their elite compatriots first and finally slow down inflation and asset prices but given their history that seems like wishful thinking.
that is one possibility, the other is that their intent is different than what one would expect, it's pretty much impossible to tell which is it.
consider the war on drugs, an utter failure if one believes that it's actually intended to diminish drug use. however given it only recently begun slowing down, without real signs of stopping, I cannot help but consider the possibility that the actual intentions behind it have been a great success but then that means the american government has intentionally caused terrible evil towards most of latin america.
this is why I consider the possibility that it might not be incompetence in this case either
Higher prices are more than offset by lower mortgage costs. Money got cheaper faster than housing got more expensive. Most people who are not rich are buying money with a house kicker in 30 years, so the cost of money is the important factor.
Affordability will be just about record lows at 5%. Inflation adjusted home prices have already surpassed the 2000s peak, and are a few std deviations above historical norms.
If inflation doesn't abate, we can expect 6% mortgages in the near future.
This is because of maths and the inverse effects of downward and upward shifts.
- If you borrow $100 at 5% your interest is $5pa, which matches your discretionary repayment ability.
- Rates drop to 3% and you can afford to borrow $167 at 3% for the same $5pa. This is a 2% or 40% of total drop.
- New buyer buys in at cost of $167.
- To make it somewhat realistic lets say inflation comes along and income rises, now you have $6pa repayment ability.
- With a larger $167 loan, your $6 repayment can afford a rate rise to only 3.55%, this is a .55% rise or 18% total increase.
.
So while the rates dropped 2%, a rise of more than .5% bankrupts all the new buyers. The government is sensitive to this because many people just bought together at the new prices and low rates, and it becomes untenable when large amount of the population lose their homes at once.
The same dynamic applies to business loans, government balance sheets.
US is an outlier with 30 year fixed loans, the rest of the world basically does loans on variable rates or fixed for maybe 5 years a time.
They are mostly held low right now due to belief that CPI spike is transitory.
You're right that once rates rise sufficiently, it creates recession risk, which then puts downward pressure on rates. But we can likely get to 3% on the 10y and 5% mortgages before hitting that ceiling.
Keep in mind how sharply rates rose in the 70s. Though at the time debt burdens were not very high, for sure. But persistently high inflation will lead to a similar effect.
We are seeing strong signs of a wage price spiral starting to form in the data
Thanks!
But here's home price relative to median income, which is at a record. Then apply logic that mortgage rates are 4.1% now and likely to be 5% soon.
https://www.longtermtrends.net/home-price-median-annual-inco...
2000s affordability was still worse at the peak, but will shift quickly if mortgage rates continue to rise.
Anyway, will edit when I find
^ is the source most in the industry use for the current rate. It tends to be the most up to date
https://www.builderonline.com/money/mortgage-finance/heres-w...
You think that $400b is a lot to "print"? Billionaires increased their wealth 10-fold in the same time, let alone the millionaires that have made a fortune from 10 years of rocketing stock market growth and leverage availability.
Famously the FED “takes fiscal policy as it arrives at their doorstep”
You should re-evaluate some of the connections you’re making, because you have good thoughts, but your villains are the wrong Ones.
Please either quantify the Cantillon effect or find a new scapegoat.
The issue is zoning.
It's hard to take this kind of rhetoric seriously, given that investors are the ones fomenting inequality here. There's no point in speculating on real estate/house value in a society where everyone is guaranteed a home -- where would the demand be?
Yes. The use of capital to purchase large scale investments causing negative ripple effects on society is communism. The system that famously loves and allows for private capital.
This was a move by the Trump administration, was it not? And especially the "no ability to track" part of the handout to big business.
Authoritarian communism certainly is, no disagreement there. But in America, everything left of the GQP is branded as "communism" these days, including stuff that is considered a basic part of the system in Europe like public, affordable healthcare.
If Americans were able to debate the successes of European policy - and that includes even part of what the former GDR did, like providing access to childcare for mothers so they could work, or provide access to safe abortions - on face value, without resorting to "but that's communism!!!", your life would be so much better.
Huh? What you see here is capitalism in action.
Young people just need to cancel their Netflix, stop buying Starbucks, iPhones and pull themselves up by their bootstraps! /s
They claimed they were helping the middle and lower classes with all of that money printing, but what they really did is send a 600$ check and then push those classes further into wage slavery. We are watching the looting of the american citizen in real time, communism/collectivism is once again the wolf in sheeps clothing.
There is no free lunch.
Last thing, theres an equation in finance, I forget it, but roughly:
Cost to borrow money (for an institutional investor) and buy a home with that money, is generating a positive return. As long as that is true, they will continue purchasing homes at a rapid rate. This is a monetary issue, money should not be available to buy homes like this. This is incompetence and negligence from the financial elite governing our nation.