[HN Gopher] Research suggests that when the rich bank, the rest ...
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Research suggests that when the rich bank, the rest borrow
Author : gamechangr
Score : 152 points
Date : 2021-06-09 17:30 UTC (5 hours ago)
(HTM) web link (review.chicagobooth.edu)
(TXT) w3m dump (review.chicagobooth.edu)
| orlovs wrote:
| Oh well, yet another publication "rich bad, poor good". I will
| leave out payday lending, buying small goods on credit etc. Lets
| talk about mortgages and student loan. Let's face it, if you are
| rich you have become rich somehow or stayed rich ( even harder
| than first one) you probably understand risk management. What we
| have got here: you are lending your capital to folks who are less
| rich (much less trustworthy). Why you are lending to them if risk
| relatively is pretty high? Actually, its not student loans in
| most of civilized society is backed by government programs,
| mortgages is backed by GSEs. You can land money with relatively
| no risk at all. I am oversimplify but, many problems comes from
| politician will "help little people/protect little people" or
| called aswell "to get elected or reelected". Our friends in
| government puts incentives to lend money to consumption without
| almost risk. And I am from Europe/Baltics. We have got our own
| "helpful programmes". Like government agency lends you
| downpayment for mortgage with pretty barbaric rate. So what
| happened, default downpayment have gone up from 10% to 15-20% to
| get skin in the game from lender. Who suffers the most? Those who
| have got these 10% for downpayment.
| lordnacho wrote:
| One thing that needs to be mentioned is how the investments are
| allocated. It seems to me that many white-collar people are stuck
| with some very vanilla investments. You can:
|
| - Stick your money in a pension fund managed by some
| professional. This guy has very little incentive to do anything
| interesting. But you don't have time to look at a bunch of stocks
| and bonds, so you'll get index + noise - costs. The big thing
| here is the manager feels constrained, whoever he is. There's a
| mandate and you have to stick to it, so be conservative.
|
| - DIY your investments. Probably this means listed equities or
| indices. If you're a great stock picker, that's great for you,
| but the money is simply sat in the stock market waiting for your
| retirement. Listed firms tend to have the opportunity taken out
| already, mostly.
|
| - Stick your money in a hedge fund. Not everyone is allowed to do
| this, maybe someone got burned on it in the past. This isn't
| necessarily much different from option 0, but more leverage and
| better information might help some of these funds beat the
| market. As a whole, probably not, but at least you can look at
| other things than just buy-and-hold some stocks.
|
| - Invest in new businesses. You can certainly pony up the money
| to start a restaurant or a gym or whatever. People do this, heck
| I'm doing it, but I don't see it much. I get the sense that we'd
| be much better served with most people plowing their money into
| local businesses than the stock market. Skin in the local game.
| But it's also quite hard to build trust, you need to go through a
| lot of potential partners to find ones you like. Or get lucky and
| meet someone.
|
| - Give your money to a VC firm. Back to agency problems. Does the
| VC have incentives to build businesses? It seems like the
| incentive these days is to swing for the fences on all the
| investments and hope some do well. Might work for the VC, but
| does this work for society? I'm sure there are a number of burned
| out unicorns that would have been fine as medium-to-large
| businesses.
|
| - How about PE? Maybe I'm just cynical, but PE seems like
| extractive financial trickery. Buy a firm, load with debt, pay
| the PE firm, hope things work out anyway. What happens to the
| investment? Well it's still gonna be in established firms, often
| big ones. A lot of that money ends up with management, who will
| have the same problem that we're thinking about (money from the
| acquisition incentive burning a hole).
|
| - Invest in firms in other countries. You don't know people or
| legal systems in other places. Big lemon problem.
| quantified wrote:
| Can this be seen as simply hoarding money?
| jl2718 wrote:
| No. It's housing prices pumped by federal loan guarantees.
| pedro_hab wrote:
| Yeah, the government also artificially suppresses interest
| rates, making it easier to get mortgages yet somehow the blame
| goes to the lenders.
| yunohn wrote:
| > somehow the blame goes to the lenders
|
| I find this statement quite tone-deaf. It's hard to blame
| people for wanting a roof over their heads.
| imtringued wrote:
| It's the neoliberal mindset and everyone is falling for it.
| Pretty much every party in Germany is neoliberal. The irony
| is that a lot of neoliberal thinking is self defeating.
|
| Honestly, after I learned about neoliberalism I came to
| peace with the world because I know everyone deserves their
| suffering and there is no injustice. All those republican
| voters are voting for their own doom. It's fantastic. I no
| longer need to feel bad about their suffering because there
| is no contradiction, no conspiracy theory, no trick, no
| evil cartoon villain behind the scenes.
| pedro_hab wrote:
| Can you give an example of a country that archived
| economic prosperity using leftist policies?
|
| I also find your comment on republicans quite wrong,
| since I don't see many differences between republicans vs
| democrats.
|
| Both have been running ever increasing deficits, each
| president tops all previous presidents combined.
|
| You can't really say any of the US policies have liberal.
| pedro_hab wrote:
| We don't seem to have houses for everyone, people gotta
| work and produce to earn a house.
|
| If you start giving mortgages with artificially low
| interest rates, people who haven't produced things to
| offset their consumption will get houses, which will
| increase the prices.
|
| Of course a lot of other factors play roles into this.
|
| > It's hard to blame people for wanting a roof over their
| heads.
|
| I, in turn, find your statement quite naive, it would be
| great if everyone had a house, that doesn't mean we should
| just give it them, there are consequences, the prices will
| rise.
| anchpop wrote:
| Maybe you're thinking of borrowers? Lenders are the ones
| who give the loans and make money from interest.
| imtringued wrote:
| Unfortunately it doesn't. It's artificially keeping them up
| because 0% is the effective lower bound and interest rates
| should be well into negative territory because savers don't
| care that their savings do not represent real wealth in the
| economy.
| pedro_hab wrote:
| No it isn't, the FED is buying mortgages and treasuries to
| keep the rates from rising.
|
| How can you say rates would be higher absent the FED buying
| it?
|
| Rates aren't negative nominally, but they are negative
| taking inflation into account.
| vmception wrote:
| > "People get angry about seeing the rich consuming a lot," Sufi
| says, "but that's better than what they're actually doing."
|
| I'm going to use that line
| wvenable wrote:
| Money needs to _move_ to benefit the economy. In my opinion,
| one of the big problems with the super-rich is they have more
| money than they can ever spend (over several lifetimes). This
| money is just siphoned out of the economy. We 're taking
| natural resources and work and converting it into a number in a
| computer and that's it.
|
| There is such a glut of money doing nothing that there is
| hardly any place to even invest it. You even have companies,
| like Apple, sitting on massive cash piles. A pandemic can't
| affect the stock market or housing because all this money needs
| somewhere to be.
| vmception wrote:
| The central banks think they can make the money move if they
| buy everything reputable and force everyone else to consider
| buying less reputable things. This is somewhat happening but
| not in great enough numbers, one of the desired examples
| being SPACs buying startups where VC's and the whole
| population continue underservicing, the less desired examples
| being "meme" stocks but it is good when those companies
| recapitalize with direct issuances, unexpected examples being
| intangibles and obscure cryptos and I'm not offering an
| opinion about that, I do know it is not the point of the
| central banks monetary policy. They want people to be forced
| to invest in founders without pedigrees. Simple. As we can
| see, people would rather pay the government to not risk their
| own money like that, inflation concerns be damned.
|
| The hoarded money will _really_ move if the central banks A)
| stopped buying and B) _sold_ everything
|
| What Congress can do: keep wage workers on basic during
| recessionary periods and don't let the Fed buy bonds and
| mortgaged backed securities
|
| So everything tanks to its natural market price while
| employers convulse and stop hiring, and more capital
| efficient organizations replace them, and the unemployment
| numbers can be ignored because they're fine for now
| didibus wrote:
| I think this is a very important thing to study some more. The
| entire system is built on the assumption that money goes round,
| never sits idle, and is always used to productive use in terms of
| growing production.
|
| If it's true that there are issues at that level, we really need
| to better understand them and address them.
|
| If we make things very simplistic. If I'm the only one that has a
| spear and I hunt a deer with it. I cannot eat it all. I'll have
| the best parts and a good chunk of it to satiety. Now I'm left
| with a lot more deer leftovers.
|
| If I just froze it and never went hunting again for the next 4
| weeks, by just eating more of that frozen deer. Keeping in mind
| I'm the only one with a spear. That be very bad economically,
| what are the others to hunt with? What are they all to eat?
|
| Now, the morgage loans are like if someone comes and say, could I
| have some of your frozen deer to eat? And I were to say, yes you
| can have a little bit, but in repayment you owe me a full deer
| which you must give me in the next year (which others will need
| to hunt by hand, since they don't have a spear).
|
| Over time, what happens is all hunted deers by everyone goes to
| me, as everyone owes me a deer. And I now own all hunted deers,
| trading more of its meat for more repayment of more deers.
|
| The issue with this is that there's always a surplus of deer, and
| yet everyone is in dept and only eating a fraction. In effect,
| deer production is wasted.
|
| Another issue with this, is that it did not contribute to boost
| production of deers or anything else.
|
| A better scenario is that I don't freeze my leftover deer.
| Instead I trade it to others for other things. If I did this, I
| create a market for other goods, and I boost the production of
| more things. Like maybe I trade it to people and I ask in
| exchange for it to have a second spear built. This allows spear
| manufacturing to grow, and also it gives me two spears that I can
| now use to hunt more deer with. Having commissioned this, I also
| enabled someone else to learn how to make spears, which they can
| now make for themselves or others. You could assume prior to that
| they simply didn't have the time to explore making spears,
| because they constantly needed to hunt for food by hand just to
| survive.
|
| So this explained three scenarios:
|
| 1. Money is horded idle, where I just freeze the deer for myself
| and live off of it for the next 4 weeks until I hunt again.
|
| 2. Money is invested in unproductive ways, creating a dept cycle
| of the poor while boosting my own wealth. Where I loan parts of
| my frozen deer in exchange for a future full deer from others.
|
| 3. Money is spent in productive investment. Where I don't freeze
| the deer at all, I simply spend it on the economy, such as by
| investing in say spear making. Which both increases my wealth
| (since I own two spears now), but also grew the economy (others
| can make spears now), while creating zero dept. Well, or
| potentially dept was that I give you some deer meet and you now
| owe me a spear, which in turn was more productive dept.
| (Depending if the relationship is Employer/Employee or
| Investor/Entrepreneur).
|
| Number 3 is where we want to be at, and I'd say is the
| "idealistic Capitalist model" in a nutshell. It's very important
| we make sure we remain in #3. The good thing about number 3 is
| that while it's very possible I remain the richest man, and in
| fact it might make me richer than even #2 ever would have, since
| instead of owning all the deers with poor deer production, I now
| possibly own all deer hunting production, mechanisms, know how,
| and the whole deer production has become much more efficient, and
| I can own it's whole process, and maybe even I've now ventured in
| other things. I've also grown the economy as a whole, and raised
| the standard for what it means to be the poorest man.
|
| In that perspective, the gap between rich and poor isn't as
| important as the standard of living. The gap might be bigger than
| in #2, yet everyone is better off.
|
| But again, if we're slowly shifting to #2 over #3, then it means
| that I am becoming richer and richer, widening the gap, and
| everyone's else's lives are just as harsh as ever. We don't want
| that, we want #3.
| gimmeThaBeet wrote:
| I'm a bit confused reading this, the argument that the 1%+
| echelon are ~= to corporations in an aggregate model, and that
| effectively corporations are underinvesting? Or rather that the
| 1% are under-consuming, and so any evaluations of net household
| saving/consumption are skewed because there is dramatically more
| saving on one side and more aggregate debt on the other. I
| haven't seen what recent levels of corp/household/gov/balance
| spending/saving are.
|
| I also like to refer to this post for these kind of macro
| questions. I'm not an economist, but it's interesting to see how
| all the pieces fit together.
|
| https://nathantankus.substack.com/p/where-do-profits-come-fr...
| vinhboy wrote:
| > Say a corporation issues equity to the wealthy, but instead of
| spending the proceeds on research or equipment, puts that money
| into a time deposit at a bank, which in turn uses it to fund a
| mortgage for a less-affluent household.
|
| Am I understanding this correctly? They are saying that because
| corporations are saving more, the savings become money that can
| be loaned to people, and because there is more money to loan, the
| price of everything goes up, therefore hurting the poor
| unintentionally? That's pretty interesting.
| cheph wrote:
| By that logic the Fed's low rates is what buried the middle
| class in debt by a much larger degree than corporate savings.
| CityOfThrowaway wrote:
| Yes, this is the right answer
| quadrangle wrote:
| Whether they mean it or not, it's sensible. Mortgage amounts
| correlate to home prices. Consider the most basic idea that if
| mortgages did not exist, there would be far fewer people who
| could pay a premium price for a house, and thus the housing
| market would be forced to cater to the much lower prices and
| less expensive housing that people could afford without
| mortgages. I mean, except there's some point where the reality
| is just untenable, people need to be able to borrow. But the
| easier it is to borrow, the easier it is for more people to buy
| more expensive houses and bid up the prices.
| amalcon wrote:
| Hmm, this would be pretty easy to test I'd think. You should
| see a definite knee in US property prices around $612k ($510k
| conforming loan maximum + 20% standard down payment). Above
| that price, loans will be harder to obtain and command higher
| interest rates.
|
| Does anyone have a good source of this kind of data?
| majormajor wrote:
| The conforming loan max is different in different areas, so
| you'd have to look at this very regionally. 20% is hardly
| universal too.
|
| When I looked, non-conforming loans had slightly higher
| rates, but in a sub-3% world... it wasn't a huge
| difference. Sometimes down payment affected the rate,
| sometimes it didn't. Lenders seemed to have a lot of knobs
| to tweak on the backend to make it work if they wanted to
| make the loan for clients who were shopping around.
| xeromal wrote:
| ala 2008 jumbo loans
| b9a2cab5 wrote:
| Except housing prices aren't what matter, monthly payments
| are. If interest rates are lower but payments are the same,
| the only people that benefit are existing homeowners, but new
| home buyers aren't harmed since monthly payments stay the
| same. The banks and MBS investors are the ones who get
| screwed since they make super low rates.
|
| In some ways lower interest rates is actually better since
| higher home values mean you can spend more on amenities like
| high end kitchen and bathroom as a builder.
|
| The issue comes when you start looking at sub-prime debtors
| like students. If you have a 300 bps risk premium for being
| an unreliable borrower but the interest rate for reliable
| creditors is only 2%, your risk premium is 150%, but if the
| reliable borrower rate was 6% then your risk premium is only
| 50%. Add to this the fact that refinancing student loans
| (issued by the government) causes them to lose benefits like
| the 0% interest pause we have right now. That means the
| government intervention has caused a market distortion: you
| can't fungibly exchange your loan for a refinanced one at the
| market rate but instead are stuck with the 5-8% rates from 5
| years ago.
|
| Government intervention also has other impacts: since you
| can't discharge student loans in bankruptcy, there's no
| incentive for universities to make students succeed or to
| discriminate admittance/cost by major (proxy for future
| earning power). That means we have a huge number of people
| stuck with high interest loans they can't discharge or
| refinance and useless degrees in majors that have 0 value to
| society. If you changed this to allow students to discharge
| student debt in bankruptcy and forced universities to assume
| the risk instead of the government, university incentives
| would be aligned with student incentives.
| iso1631 wrote:
| Well no, people with capital would be able to buy the houses
| and then rent it out, extracting the maximum amount they can.
|
| As wages go up, the money available for people to pay for
| housing goes up.
|
| If a given city employs people and pays enough that 1 person
| earning an typical wage can afford $1k a month rent, then
| that's what rent will be. It won't be lower (because
| landlords will charge the most they can), but it won't be
| higher (people will move to another city - perhaps one with
| lower wages, but lower rent).
|
| When we switched to a society where it was normal to have 2
| incomes in a given house, the money available to pay for
| housing increased dramatically (towards $2k, but for families
| you'd have to remove things like childcare costs which would
| normally have been done by 1 person), and thus rents increase
| to the point where supply/demand returns to an equilibrium.
|
| Now aside from rent, you could also buy. A house costs
| whatever the maintenence is, plus the interest cost of the
| mortgage (there's also the capital repayment part and the
| likelihood of the house increasing in value in the future)
|
| Rents are also capped by this - if the cost of buying
| (including the maintenence) goes below renting, then people
| will buy. That means house prices are constrained by rental -
| if the cost of buying/owning house is too much, people will
| rent. Ultimately they to can always move out of the city and
| leave their job.
|
| When interest rates went down, people could spent more on
| buying a house, which meant prices went up.
|
| Imagine a couple that have a budget for $2k a month for
| housing. If interest rates were to double, mortgage costs
| would increase. That wouldn't change rents (which would still
| be $2k), but instead of a house costing say $800k (2k/month
| allowing 800k loan at 3% interest), instead people could only
| borrow say 400k. That means that houses go down to 400k, but
| still cost the same per month.
|
| This is great for people with spare cash, as they can buy up
| those cheaper properties without having to pay the interest,
| and still get their $2k/month rent coming in.
|
| It's no change for people who want to buy for $2k/month,
| that's what they can afford, and it's going to be roughly the
| same as what it would cost to rent.
|
| It's terrible for people who want to sell and repay their
| equity, as the house price has suddenly halved. They bought
| it with an 800k loan, have repaid 10% of that, and owe 720k,
| now they can only sell for 400k. So they rent it out instead
| and rent somewhere else.
| majormajor wrote:
| Even more direct is the link between interest rates and house
| prices. Lower rates push up prices for everyone, you don't
| get the choice of borrowing X at a better rate to save money
| every month instead of borrowing X+Y with the same payment if
| someone else is out there willing to pay X+Y.
|
| It's an interesting dynamic of the more reckless moving the
| market for everyone and harming not just themselves, but also
| others, and the potential link to more money being available
| for lending due to inequality is very interesting indeed,
| because it suggests a nasty negative cycle.
| mumblemumble wrote:
| I'm not even sure it's reckless. Especially with rates so
| low, even a fairly small absolute change in interest rates
| can have a huge impact on the _actual_ price you
| theoretically pay for the house, which includes both
| principal and interest. Paying way too much at 2.75% may
| actually be less expensive than paying a more reasonable
| price at 3.25%.
|
| Meaning that, if you've got any concerns that rates might
| go up in the near future, you're reasonably well
| incentivized to get into a bidding war in order to close
| now instead of later.
| weatherlight wrote:
| college tuitions, mortgages, etc.
| runawaybottle wrote:
| Right, _financing_ is the word we're looking for. We give
| people credit cards, college loans, car loans, home loans,
| your phone is a loan, etc. Everything is financed so people
| don't really save up to outright purchase something.
|
| It brings us to a fundamental question, and that is, how
| many years should it really take for someone to buy
| anything with straight cash. For homes the market believes
| 15-30 years. For college, it believes something like 2
| years to the day you die lol.
|
| Dare I say the people that actually own this stuff before
| everyone else may believe you should never be able to
| afford it. That you will buy any number of these things and
| keep paying until the day you die. Life-as-a-service.
|
| If we ever answer the question of 'how many years of
| income', we'll have no choice but to come to the conclusion
| that sellers are operating in the realm of cruelty. That
| one can charge 30 years of your income and frugality for
| what they are selling. It's unreasonable to ask for such a
| thing, so instead we don't speak about it and hide the
| disgusting asking price behind financing.
| ajsnigrutin wrote:
| > If we ever answer the question of 'how many years of
| income', we'll have no choice but to come to the
| conclusion that sellers are operating in the realm of
| cruelty. That one can charge 30 years of your income and
| frugality for what they are selling. It's unreasonable to
| ask for such a thing, so instead we don't speak about it
| and hide the disgusting asking price behind financing.
|
| This is true, when other regulations prevent people from
| creating more of the goods. Yes, a seller can sell a box
| of pasta for $100k... but who will buy it, if you can
| make your own pasta for cheap, and even sell it to people
| who want to buy it, but don't want to pay the first
| sellers house.
|
| In my city, the housing prices are fscking high and
| rising, but we have literal cornfields and cows in places
| that are technically the middle of the city. We have
| right governments, who don't do anything about housing,
| we have left governments, saying they'll rais the rent
| taxes (so making rents higher) and build government
| apartment buildings (=too expensive) for people (=their
| friends), but noone stops to look at the satellite map
| and say "hmm.. we could build here, and there, and
| there...".
|
| Look at San francico for example... there is a huge need
| for housing, but most of the houses are single family
| houses... there's no way to pack so many people there in
| such houses - you need to build huge apartments
| buildings, but regulation does not allow that, and
| housing is expensive.
| yunohn wrote:
| > Mortgage amounts correlate to home prices.
|
| This is completely true. Another example, in NL, the gov
| removed "transfer tax" on first-home purchases in 2021. This
| led to an increase in housing prices, as the "savings" just
| helped people bid higher on houses.
|
| The world and its economy are absurd.
| sudosysgen wrote:
| Housing markets just really suck. They tend to settle just
| so as to be too expensive for many and extract tons of
| value from the poor.
| freeone3000 wrote:
| That's how markets work, no? The goal of pricing a scarce
| good is to put it at what people are willing to pay,
| which for something you need to live, is all they are
| able to pay. The system is working as designed.
| HWR_14 wrote:
| It's not a good system, so who cares if it is "as
| designed"?
|
| If pushing the "confirm order" button on your ecommerce
| site launches a nuclear-tipped ICBM, the fact that it's
| "to spec" doesn't really mean much.
| treis wrote:
| The market working would be supply matching the demand to
| keep prices relatively steady. But supply is artificially
| restricted leading to stupid price increases.
| sudosysgen wrote:
| The GP alluded to housing being a scarce good. Yes, you
| can increase housing density, but you eventually hit a
| wall where infrastructure is limiting and expensive to
| build meaning that you can't drop the price of housing.
| At which point the only solution is to build more cities
| or enter a death spiral.
|
| It's why China had to start building cities, eventually
| density stops being economically feasible either.
| treis wrote:
| Sure, but the wall is not a million bucks for a 3/2 home.
| jfrunyon wrote:
| That's a bit strange to say. Supply is restricted largely
| by capital required to compete. Because that results in
| more profits, it's the default tendency of
| capitalism/"free market" policies. So in a sense, it's
| naturally restricted, not artificially.
| TimPC wrote:
| Supply is also naturally restricted because there is only
| so much land in an area. Especially when we are talking
| about people interested in their own dwelling/home where
| building a condo just means they look elsewhere. People
| forget this basic fact a lot when talking about housing.
| reducesuffering wrote:
| Luckily humanity learned to build skyscrapers eons ago.
| You're forgetting about the many people who would easily
| shift to condo housing if it was 2x cheaper, but aren't
| because it's marginally cheaper than a SFH, and they
| don't want to put 3x their net worth into a condo that
| will probably end up financially worse than a SFH. So you
| still have a huge population that would live in condo's
| if it was more affordable. And housing pricing is all
| about the margins of the market, so you fix that
| imbalance and you make the housing market a whole lot
| more healthy.
| sudosysgen wrote:
| Skyscrapers get expensive quick and can rapidly max out
| the infrastructure.
| ako wrote:
| So the real question is, should we design a different
| system?
| lamontcg wrote:
| Yeah for something like healthcare, people are desperate
| to live and not die, so the healthcare system in a market
| economy easily expands to the point where people are
| working their whole lives to the point where the
| healthcare system can ultimately confiscate all of that
| value back. You lose your job, your insurance, you draw
| down all your savings and then you get some level of
| poverty support. Meanwhile the insurance system itself
| tries to expand to grab all your marginal earnings
| increases before you actually get sick. Since the demand
| is completely inelastic and insensitive to pricing
| increases due to most people wanting healthcare to avoid
| their own death, it just expands.
| gnopgnip wrote:
| The market is not a zero sum game. If mortgages were illegal,
| the same houses would just be more expensive overall, and
| effectively most would be living in smaller or worse homes as
| a result.
| sologoub wrote:
| It cuts both ways - if it wasn't for FHA and very easy
| borrowing for first time home buyers, many many more people
| would still be renting and likely not building at least some
| wealth/equity.
|
| By constraining the supply of loans, first and foremost you'd
| be cutting out those who need it most. Unfortunately, that's
| how risk markets work - the riskiest (also usually the
| poorest) get cut first.
|
| The interest rate argument isn't actually very grounded in
| fact - in order to save from refinancing, the rates have to
| have declined from where they were before. If rates stay
| flat, there is no benefits in refi - whether they stay flat
| at 5%, 3% or 10%, as long as the rates stay flat. However,
| borrowing at a lower rate is better because you end up
| putting more into the equity. If you borrow at zero percent,
| everything you pay in goes to reduce the principle and so
| long as the property doesn't decline, you are building
| wealth.
|
| This is why arguing to reduce the loan supply to me is very
| counterproductive. What we need is better education and fewer
| predatory lending practices. Things like payday loans, etc,
| are currently predatory. Those could be reformed to serve the
| purpose they were originally intended for (emergency money),
| but until that happens, things like that create the actual
| problem, not the loan supply itself.
| analyst74 wrote:
| > many many more people would still be renting and likely
| not building at least some wealth/equity.
|
| This seems true intuitively, but if you think deeper, where
| does that accumulated wealth/equity come from? They are
| paid by future generations of regular people, or
| generational wealth transfer as some call it.
| kcatskcolbdi wrote:
| Banks don't need funding to supply mortgages. Or, more
| accurately, they need only 10% funding and that has never been
| a bottleneck before. It isn't the reason mortgage prices are
| rising.
| marton78 wrote:
| There is no bottleneck, the opposite is true! Banks need only
| 10% funding, yes, which means for a one million deposit they
| can create 9 million in debt, thereby reducing the cost of
| money, thereby inflating asset prices.
| [deleted]
| deevolution wrote:
| Yes that's basically how money is created. Money is then
| destroyed when the debt is repaid. Great video resource about
| money narrated by Ray Dalio: https://youtu.be/PHe0bXAIuk0
| ed_elliott_asc wrote:
| Take cars, no one buys a new car with cash anymore - they are
| all financed which means people can afford to spend more on a
| car, which means cars are more expensive.
|
| Cheap finance is the fuel to inflation and corporations love
| dousing those flames and getting their revenue figures higher.
| fiftyfifty wrote:
| This is because when a bank loans out money in most modern
| countries they in turn borrow the money from a federal
| reserve bank which in turn just creates the money to be
| loaned out. This is how federal reserve banks create more
| money. The idea being that loans drive the economy through
| building businesses and infrastructure but it also has the
| side effect of driving up the cost (inflation) for consumers
| of everything that can be paid for with loans: houses, cars
| and higher education and most of those things don't grow the
| economy in the same way a business loan would.
| HPsquared wrote:
| Commercial banks are where money is created. When a
| commercial bank 'makes' a loan, they do just that: increase
| the balance in the borrower's account (from the bank's
| perspective, this is counted as a liability), and the loan
| contract is also created (this is effectively a bond issued
| by the borrower, which is an asset now held by the bank).
|
| In a fractional reserve system, the commercial bank is
| allowed to loan out money in this way up to a set limit
| based on the amount of reserves they hold at the central
| bank. The interest rate of the central bank is the rate at
| which the central bank pays out interest on those reserves,
| not anything to do with the central bank lending money.
|
| This paper sets everything out in detail: https://www.banko
| fengland.co.uk/-/media/boe/files/quarterly-...
|
| EDIT: this explanation is the 'traditional' way, before
| central banks started doing QE. In QE, central banks
| purchase bonds and other assets, effectively 'lending'
| money out (the bond issuers will eventually, in theory, pay
| that money back). Still though, nobody is going to the
| central bank and borrowing money - the bank is buying
| assets (using money created from nothing, thereby
| increasing the money supply).
| iso1631 wrote:
| I'm not a car nerd, I don't want a car. I want to transport
| me where I want to go at a certain level of comfort,
| reliability, cost, privacy, speed etc.
|
| If I can get that for $200/month for a new car for 3 years
| then hand it back, with just known costs of insurance and
| gas, that's valuable. I don't care what the cost of the car
| is, only what the cash flow is.
|
| Sure, I could buy a car for $5k and hope that it's cheaper
| over the 3 years, hope it doesn't depreciate too much, and
| after 25 months (plus however many months to pay for the
| extra maintenance and servicing included in the first car)
| but I'm taking the extra risk. Maybe I'll come out on top,
| maybe I won't.
|
| Interest rates have been at record lows for over a decade,
| but the cost of the basket of goods the typical person buys
| hasn't changed much.
| reducesuffering wrote:
| > I'm not a car nerd, I don't want a car. I want to
| transport me where I want to go at a certain level of
| comfort, reliability, cost, privacy, speed etc.
|
| No need to waste money on a lease. Just buy a used Toyota
| at effectively 30-50% the cost of that lease you're
| getting.
| HWR_14 wrote:
| > No need to waste money on a lease. Just buy a used
| Toyota at effectively 30-50% the cost of that lease
| you're getting.
|
| The poster made it clear that he knows there are cars out
| there in the 50% range of the cost of his lease, but
| still thinks it's worth leasing. He said he believed the
| reliability (and presumably warranty) and improved style
| were worth it.
|
| Which is fine. He's making a reasonable choice.
| krapht wrote:
| No need to waste money on cloud computing. Just buy a
| used Xeon server at effectively 30-50% of the cost of
| that cloud compute you're using.
| ed_elliott_asc wrote:
| I'm in the UK and I have really noticed in the last few
| months that life is getting more expensive - eating out is
| 10-20% more, groceries are up 10-20%.
|
| Now this is partly brexit, partly covid, partly we stopped
| doing anything for months - I can see people getting a bit
| of a shock when they realise that everything has gone up
| (the RPI in the UK is the average cost of a set of items in
| a basket and this confirms it, massive drop last year and
| now higher than the trend line shows it should have been: h
| ttps://www.ons.gov.uk/businessindustryandtrade/retailindust
| ...) - will be interesting to see if this drops down again
| next year
| [deleted]
| georgeecollins wrote:
| Buying a car with a loan or a lease is wealth destroying. I
| don't care whether most people do it or not. If you are smart
| enough to be reading Hacker News you are smart enough to know
| that you don't borrow to purchase a depreciating asset. If
| you don't have the cash to buy a new car, buy used. Buy a
| beater if you have to. No wealthy or financially savvy person
| is impressed because you leased a nice car.
| HWR_14 wrote:
| > you are smart enough to know that you don't borrow to
| purchase a depreciating asset. If you don't have the cash
| to buy a new car, buy used.
|
| This is nonsense. If you can borrow money for less than you
| can earn, you should borrow. I know people who, buying a
| new car, had saved cash to do so. But they got 0%
| financing. So even sticking that money in a CD made them
| more cash.
|
| What you mean to say is "if you do not realize that you are
| paying a lot of money for the use of a new car, not for an
| asset"
| WalterBright wrote:
| > That's pretty interesting
|
| It's also nonsense. The giant debt is coming from government
| borrow and spend of trillions and trillions of dollars, with
| more trillions being proposed.
|
| The difference between corporate debt and government debt is
| corporate debt is backed by assets, which is not inflationary.
| Government debt is backed by nothing, hence it is inflationary.
| LatteLazy wrote:
| This isn't really true.
|
| Governments can print money. And they can raise taxes
| (immediately upping their revenue). Those are their "assets".
| Much more reliable ones than the average business.
|
| Now look at most businesses. What assets do they have? Second
| hand manufacturing equipment at best, basically scrap. And
| that's the companies that have at least some. What assets
| does Facebook have? A brand name is the main one, you can't
| resell that really... Lots of western companies are basically
| hollow.
|
| I can't comment on the core point of the article, I'm just
| saying you're a lot safer with government debt than
| corporate...
| mariodiana wrote:
| It's worse than nonsense. "Savings considered harmful" -- is
| that the proposition? It's economically destructive. It's
| propaganda for this Modern Monetary Theory idea that
| encourages basically printing money, ad infinitum.
| HWR_14 wrote:
| > Government debt is backed by nothing, hence it is
| inflationary.
|
| Which is strange. You would expect if that was the case
| people to charge the government non-trivial amounts of
| interest. And yet, the interest rate the government spends on
| interest for a 20-year loan is 2.1% APR.
| wahern wrote:
| > The difference between corporate debt and government debt
| is corporate debt is backed by assets, which is not
| inflationary.
|
| If this were true corporations would never become insolvent.
| The role of CDOs and CDSs in the 2008 crisis made it
| abundantly clear how corporate debt can be inflationary. But
| we knew that beforehand from previous crises in the 19th and
| early 20th century when unwinding corporate debt and
| restoring liquidity was handled (if at all) almost entirely
| in the smokey parlors of the private sector by titans like J.
| P. Morgan. See, e.g.,
| https://en.wikipedia.org/wiki/Panic_of_1907 More generally,
| see Lords of Finance
| (https://en.wikipedia.org/wiki/Lords_of_Finance), an
| historical account of early 20th century international
| banking which swept up numerous history and economics awards.
| (It was coincidence that it was published amidst the 2008
| crisis. IIRC nothing in the book mentions it except possibly
| a foreword.)
| notahacker wrote:
| Your version actually makes a better argument for causality
| than the original one (which appears to be essentially _bank
| and government debt may be less efficient allocation of capital
| than other theoretical uses the corporations could have put the
| money to but chose not to because they couldn 't find any more
| efficient uses for it_). But it's still not quite right: banks
| can and always do lend much more than is deposited with them,
| and the main thing that reduces their lending is changes in
| interest rates, which is a policy decision taken by the Fed
| (whose primary driver is actually stopping most prices rising
| too fast). If the Fed raised the interest rate tomorrow, the
| rich would actually expect to earn _more_ from their money
| being loaned to consumers, but the demand for mortgages and
| personal loans would be lower. As the supply of money available
| for banks to lend is largely not determined by the rich (unlike
| a Gold Standard type system with fixed money supply), their
| preference for putting money in banks is like pushing on a
| string when it comes to consumers loaning more money.
|
| It's almost the other way round: corporations raking in massive
| profits and having the option to keep funds in banks rather
| than reinvest in the corporation is a symptom of not much
| competition. That lack of competition does push prices for poor
| people up and wages down and that may be one of the reasons why
| they need to borrow more.
|
| (Housing market policy obviously also plays a massive role in
| the size of mortgage debt too.)
| jfrunyon wrote:
| It seems to me that the original is more along the lines of
| "bank and government debt may be less efficient allocation of
| capital than giving it to the people who will end up spending
| it anyway". Because it is. Debt is almost always less
| efficient than using cash - especially if you're not rich.
| notahacker wrote:
| Yes and no. Debt is obviously less beneficial than cash to
| the person who has to repay, and cash carries an
| opportunity cost rather than a direct one with repayment
| timescales, but newly created money is more likely to be
| allocated efficiently _with respect to economic growth_
| when handed to those who expect to be able to repay. You
| can plausibly argue it 's [Kaldor Hicks] efficient as well
| as more equitable to take money off the rich and give it to
| ordinary consumers if the rich aren't reinvesting in
| businesses because they don't see people having the funds
| to demand stuff in future (or if they're intentionally
| stifling their part of the economy or plain unimaginative)
| but the article seems to stop short of committing to that.
| It suggests government debt (much of it as a result of
| handouts to the needy) is part of the problem and appears
| lukewarm about redistribution.
| dnautics wrote:
| The primary driver of the fed is stopping prices from
| increasing too fast? The fed does talk about inflation, but
| unless my perception is wrong, they talk about employment
| more.
| reducesuffering wrote:
| I think you're interpretation is correct and GP is wrong to
| think the "primary driver of the Fed is stopping prices
| from increasing too fast." Fed has recently repeatedly
| stated it's goal is to drive down unemployment and is
| willing to let inflation run hot to achieve that. It's
| always a balancing act if one of them is worse than the
| other, they will focus on that. However it looks like when
| both of them are bad, they would rather focus on
| unemployment by letting inflation hit harder.
| notahacker wrote:
| The Fed has a formal target of 2% inflation (the major
| change recently was to allow it to be 2% on average, over
| time rather than 2% period)
|
| It doesn't have any employment target, although obviously
| extremes of unemployment is something it pays some
| attention to when deciding whether it's OK to miss its
| primary target or not.
| Geee wrote:
| There's a mistake in that comment. The opposite is true.
| Central banks primary driver is to stop CPI prices from
| decreasing, which happens naturally because economic
| productivity increases with technological progress, making
| it easier and cheaper to produce goods and services.
|
| Money is created to revert this development so that CPI
| prices increase at the rate of 2% per year. Naturally, life
| would get easier because of technology, but instead life is
| made harder and harder to incentivize economic growth and
| environmental destruction, and keeping people in jobs that
| are not necessary or keeping work days longer than
| necessary (hamster-wheel economy).
|
| It's important to note that inflation is relative to CPI
| prices, because CPI prices will naturally decrease but
| prices of scarce assets like real estate will relatively
| increase because they're more limited by space, time and
| energy. On the other hand, digital goods and services are
| highly deflationary, i.e. digital consumption is getting
| cheaper. So, there's digital deflation, 2% CPI inflation,
| 10% (or more) asset inflation.
| dnautics wrote:
| True. I would 100% agree that the fed's priorities,
| (north star: maintain 'stability' for some definition of
| stability), in order of importance are:
|
| KPI 1. Keep prices from decreasing (screw the poor, put
| the middle class on a hamster wheel so they don't get too
| powerful)
|
| KPI 2. Keep employment up (if you're working you're too
| busy to revolt)
|
| KPI 3. Keep prices from increasing too fast (or else
| people will have nothing to lose and will riot)
| notahacker wrote:
| Economic productivity increases, but so does the amount
| of units of stuff consumers want, the number of consumers
| demanding stuff (and the number of retired consumers) and
| there are also real resource constraints, especially
| affecting energy prices.
|
| The bank's target is symmetric, but inflation was on
| average much higher in the decades before central banks'
| target became CPI inflation
| pram wrote:
| A loan in a fractional reserve system is inflationary because
| it increases the money supply.
| ampdepolymerase wrote:
| Perhaps it is time to go back to the Gold standard. No more
| fractional reserve banking, Bretton Woods anyone?
| HWR_14 wrote:
| How does the gold standard in any way prevent fractional
| reserve banking, since fractional reserve banking predates
| moving off the gold standard?
| jackson1442 wrote:
| Yup. Same reason college costs are obscenely high. Everyone's
| guaranteed a loan to cover whatever amount of educational
| expenses they have, so colleges can charge however much money
| they want.
| syops wrote:
| Public institutions aren't free to charge whatever they want,
| at least in my state. My college needs permission to raise
| tuition. While state funding per student has declined in my
| state the legislature has mandated that tuition be lowered or
| held steady in recent years.
| nverno wrote:
| They are saying rich people are indirectly financing poor
| peoples' debt by owning stocks and bonds because corporations are
| then stockpiling cash. Not very convincing as a causal reason the
| middle class got buried in debt. Just taking advantage of the
| rich v. poor narrative
| MrFantastic wrote:
| I thought it was more that rich people use excess funds and
| debt to buy more income producing assets.
|
| Poor people have no excess cash and use debt to buy goods from
| companies and therefore the wealthy shareholders accumulate
| even more money.
|
| Only 55% of the nation own stocks. The top 1% own 38% of the
| stocks.
| pauldickwin wrote:
| To these journalists that have little understanding of
| economics, it's always a zero-sum game. They make up their own
| economics.
| quadrangle wrote:
| debt and credit _are_ zero-sum. The part that isn 't
| necessarily zero-sum is productivity. So, debt/credit
| patterns can lead to productivity, depending on the details.
|
| But I think the real point here is that when investments are
| dependent on others' debt and not on other types of returns,
| there's a whole system that is built on promoting debt,
| selling people on accepting debt...
| sudosysgen wrote:
| Indeed, generally almost everything in economics is at best
| zero sum outside of productivity.
| imtringued wrote:
| That's the reason the US government is running deficits.
| It's because it is rescuing consumers from the burden of
| taking on that debt.
| b9a2cab5 wrote:
| In nominal terms, they are zero-sum. If you consider
| inflation then debtors have the advantage since we live in
| an inflationary economy, so wages will keep pace with
| general inflation but the debt amount remains constant.
|
| Debt is an essential part to accelerating growth if used
| for productive investments (say, a degree in computer
| science). What the "middle class" (really the working poor
| but people call it the middle class) are using debt for is
| not productive; when we have layaway and things like Affirm
| financing, etc. we have lots of debt being used to purchase
| luxury goods and services. You can argue the "system" is to
| blame for people buying electronics on layaway or you can
| blame the people for being irresponsible.
|
| To whoever is going to respond by saying poor people buy
| food on credit cards: you can't use layaway and Affirm like
| services for food.
| pydry wrote:
| >If you consider inflation then debtors have the
| advantage since we live in an inflationary economy
|
| If inflation > interest. Otherwise, no.
| mariodiana wrote:
| You're getting hammered for your comment, but you're not
| wrong. This article is far more political than economic. It's
| politics is attack the rich; and as for its economics, it's a
| lot of neo-Keynesian trash.
|
| The article claims that savings by the rich is fueling both
| consumer debt and government debt, when in fact it's closer
| to the other way around. Government debt -- monetary policies
| that inflate the money supply via government debt -- is
| fueling profligate consumer spending with cheap consumer
| credit made available by easy-money policies.
|
| The ignorance here is destructive.
| rsj_hn wrote:
| > it's a lot of neo-Keynesian trash.
|
| No, Keynes argued that the rich keep interest rates too
| high and prevent the poor from taking on debt. For this
| reason he advocated for low (zero, actually) interest rates
| and programs to encourage more borrowing. Basically Keynes
| got everything he wanted and now the present outrage is
| that debt is too high and the poor are allowed to borrow
| whereas before they were prevented from doing it. In fact
| the long march of history consisted of a sequence of credit
| easing measures, even including government guarantees, in
| order to extend credit market access to virtually everyone,
| with things like underwriting standards deemed to be racist
| and in need of weakening. The end result is almost everyone
| can borrow today and at historically low rates which leads
| to, surprise, a situation in which debt levels are
| historically high. Then that, too, is blamed on "the 1%".
|
| At least Keynes had a sense of history and wasn't walking
| in the Eternal Now.
| umeshunni wrote:
| I have a basic theory that 'journalists' don't generally
| understand math, economic or finance. For one, if they did,
| they wouldn't choose to become journalists. As a result, they
| surround themselves with a bubble of low math and finance
| skills and are prone to misunderstand and conflate basic
| concepts like assets and income.
| imtringued wrote:
| Investment and savings must always be in balance. If the
| savings rate of one person exceed the total investment rate
| then another person must save less than the investment rate.
| The non zero sum answer is to increase the investment rate
| and put the money to good use by employing people. The
| article is about how that is not happening.
|
| i.e. companies have stopped borrowing money and instead fund
| themselves through issuing stock but strangely enough they do
| not sell the stock when they need it, they keep large
| portions in their own bank accounts. If companies and the
| rich are not borrowing, then either consumers or the
| government must borrow the money. Consumers take on mortgages
| to buy increasingly expensive houses but as 2008 has shown an
| overpriced house is a poor investment that drains
| productivity from the economy.
|
| Please refrain from bashing the journalist. He is not making
| up his own economics, he's stating the obvious.
| rsj_hn wrote:
| > If the savings rate of one person exceed the total
| investment rate then another person must save less than the
| investment rate.
|
| Yes, at the macro level, investment (defined as an increase
| in capital equipment or inventories) must equal savings in
| terms of national accounts, but incomes and rates as well
| as the foreign sector all adjust to make it so. You cannot
| say one controls the other. It is an equilibrium condition
| on a number of variables.
|
| It's like saying that the quantity of stocks bought is the
| quantity of stocks sold - an equilibrium relationship --
| and so whether stock volumes go up or down is completely
| determined by sellers -- a casual mechanism invented that
| satisfies the equilibrium relationship even though it is
| false.
|
| So you cannot take an equilibrium result involving many
| variables and use that to deduce that one of the variables
| is independent and the other is dependent just by
| linguistic or emotional affinity.
|
| Next, that type of savings/investment identity in the
| national accounts has nothing to do with financial
| borrowing/saving of the household sector nor even of "the
| poor" or "the 1%". What you are thinking of -- say a
| household takes out a mortgage to buy a house -- is a
| balance sheet expansion that is invisible to the national
| accounting and contributes nothing to savings or
| investment. What would contribute to savings/investment
| would be when the house is remodeled. So if I invest in my
| house by adding a better bathroom, then that will add
| savings to the economy as a whole. You can imagine that
| various inputs, for example, cement, are consumed in the
| course of expanding the bathroom, so the savings is the
| value add -- e.g. the value of the improvement net of the
| consumption required to make the improvement. And over the
| economy as a whole, if you add up all the savings (in terms
| of capital), you will get all the investment (when things
| like inventories are property treated). But this is not
| what the blogger means when she is complaining about "the
| 1%".
| pmoriarty wrote:
| _" Ideally, all those savings would be channeled into productive
| investments such as research and development, or practical
| equipment, or new roads, or even new yachts--investments that
| would promote growth in the economy."_
|
| It's important to keep in mind that even when that money is
| spent, there's no guarantee it'll be spent domestically.
|
| Just as an example, Jeff Bezos bought his $500 million superyacht
| from Oceanco, a Dutch yachtmaker.
|
| Increasingly, the ultra-rich are, like many of the companies they
| control, multinational.
| RC_ITR wrote:
| Yeah, but you can't really look at economies from that
| protectionist viewpoint. The US primarily exports services like
| software, consulting, tourism, etc. that rely on strong foreign
| economies.
|
| So if that Dutch shipbuilder needs AUTOCAD and Slack to
| function and then the employees vacation in Miami, the US still
| benefits despite the final product being produced elsewhere.
| PaulDavisThe1st wrote:
| What fraction of the US$500M do you think those benefits to
| the US might add up to?
| chairmanwow1 wrote:
| According to the Census Bureau, the trade balance between
| the US <==> Netherlands is +$17B in the US's favor [0].
| This seems to support OP's point.
|
| [0] https://www.census.gov/foreign-trade/balance/c4210.html
| PaulDavisThe1st wrote:
| Do you believe that this trade imbalance makes it likely
| that a significant part of the US$500M Bezos reportedly
| spent on the boat will return to the US?
|
| The trade numbers mean that the Netherlands spent about
| 4.5% of its GDP (US$1T) in trade with the US. That would
| imply that if the boat fits into those patterns, about
| 22M of the 500M cost might come back to the USA.
|
| One possibility is that despite not having the boatyards
| in the US that could build such a vessel, the majority or
| even just a substantial fraction of the components that
| are used for the boat originate in the USA, and that in
| reality significantly more of the US$500m will flow back
| to the USA.
|
| I don't know enough about the construction of
| contemporary mega-yachts to know if that's likely or not.
| justincormack wrote:
| The US doesn't need to produce yachts (or this particular
| type of yacht), thats the whole idea of trade, you
| specialise in some things not others, and everyone ends
| up better off. There are a huge number of components in a
| yacht, many American. And financing and so on.
| PaulDavisThe1st wrote:
| That's not relevant to the point (although I'd also
| disagree with this entire premise, the root of tariff-
| free global trade). The point is that when someone (e.g.
| Bezos) spends US$500M of realized gain, it doesn't
| necessarily get spent in the USA. That's all.
| FearlessNebula wrote:
| Why would Bezos finance a 500M yacht with his net worth?
| RC_ITR wrote:
| I'm just saying that, sure, that $500mn purchase doesn't
| exclusively benefit Americans, but if you want to force
| all Americans to 'Buy American,' don't be surprised when
| your employer's earnings/valuation go down because
| foreign customers stop buying their products as their
| economies shrink.
|
| If your argument is that we should 'Buy American' to
| subsidize low-skill/low-income workers while limiting the
| earning potential of high-skill/high-income workers, then
| I dig it, but honestly the easier/better solution is a
| more progressive tax regime/welfare state.
| PaulDavisThe1st wrote:
| We're talking about tax and the ultra-wealthy. We're
| talking about what happens when the world's richest
| person (+/- 2) spends US$500M of realized capital gains
| outside of the country of residence.
|
| I am not talking about "forc[ing] all Americans to "Buy
| American".
| Matticus_Rex wrote:
| I get where that question comes from, but I think it's the
| wrong question. The real question is, how would any
| realistic action that would cause US companies and people
| to spend more of their money in the US affect global trade
| in the aggregate?
|
| While all participants in global trade are net
| beneficiaries, the US has done particularly well.
| Protectionism is usually a two-way affair; if we make it
| harder for us to spend money abroad, other countries will
| likely reciprocate. This doesn't somehow even out to make
| us (or them) better-off for doing it -- it simply contracts
| the global division of labor and introduces deadweight
| loss, decreasing the overall efficiency of the system and
| making all parties worse-off... except for a few well-
| connected companies that get artificially protected from
| competition and have enough connections to lobby
| successfully for price supports or other pork benefits.
| PaulDavisThe1st wrote:
| It's not about making it harder to spend money abroad (at
| least not in this context).
|
| It's about a tax structure that some mitigates against
| the downsides of the ultra-rich realizing capital gains
| and spending the proceeds outside their country of
| residence.
| pauldickwin wrote:
| It's more important to keep in mind that Amazon created
| hundreds of thousands of new jobs, raised minimum wage in many
| areas, and brought many people out of absolute poverty. No
| matter which way you look at it, a net positive rather than a
| negative.
| whoaisme wrote:
| "It's more important to keep in mind that the CCP created
| hundreds of thousands of new jobs, raised minimum wage in
| many areas, and brought many people out of absolute poverty.
| No matter which way you look at it, a net positive rather
| than a negative."
|
| Your logic seems highly suspect.
| chairmanwow1 wrote:
| The CCP created hundreds of millions of new jobs and
| brought hundreds of millions of people out of absolute
| poverty.
|
| The CCP has its problems, but you must respect that so much
| economic growth has never happened so quickly for so many
| people in human history. A lot of people are living
| happier, more productive, more interesting lives because of
| the actions of the CCP.
| Matticus_Rex wrote:
| When a government drastically restricts economic freedoms
| and then restricts them less than they did, you shouldn't
| praise that government for causing the increased
| prosperity that results -- it was their fault it wasn't
| happening in the first place, and they "helped" by
| getting out of the way. Sure, you _can_ say the Deng
| Xiaoping CCP isn 't the same as Mao's CCP, and there are
| aspects of that which are true. But at most, Deng's CCP
| was simply reducing the drastic limits on economic
| freedoms that the party had put in place. They're not
| causing the prosperity -- they're declining to continue
| stopping that prosperity from happening.
| mint2 wrote:
| The question is would a similar number jobs have been
| created had there been another ruling party. It's like
| giving trump credit for investing in the vaccine, it's a
| near guarantee given America's economy that the vaccine
| would have been invested in even if Mickey Mouse had been
| president. In my mind, neither Biden nor Trump get any
| credit for the vaccines.
|
| China saw massive famines due to the Great Leap Forward,
| ccp policy, killing millions. How do we know that had a
| different government been in power the jobs wouldn't be
| created, perhaps faster like with Taiwan, and at the same
| time the famines avoided? So no, I'm not going to give
| the ccp credit for creating jobs that like as not would
| have anyway been created.
| pauldickwin wrote:
| Obviously, there are drawbacks with the CCP (and Amazon),
| but I can tell you one damn thing for sure: those people
| would not have been lifted out of poverty under the
| socialist/communist regime of Mao. Under that regime,
| people were mocked and tortured for working harder than
| others and trying to innovate. Deng Xiaoping embraced
| free markets and their own flavor of capitalism to bring
| this net positive to China.
| mariodiana wrote:
| Yes, I heard the Uighurs lives got a lot more interesting
| -- but not quite yet as interesting as did the Jews of
| Germany, when the Nazi regime lifted a nation broken by
| war out of its funk.
|
| It's simply _monstrous_ that we would compare Amazon --
| whatever criticisms someone might have for the company 's
| business practices -- with Communist China, and something
| like that needs to be called out.
| kshacker wrote:
| You mean without Amazon, we would not be buying at Whole
| Foods for example? You mean there are net new jobs not just
| jobs that may have been lost in my company? I understand
| Amazon's benefits, and I know someone else may not have
| executed as well thereby slowing progress, but who knows
| maybe YouTube tv with it's bundled benefit of YouTube
| shopping would be ruling the world and we would be discussing
| that :)
| PaulDavisThe1st wrote:
| > No matter which way you look at it, a net positive rather
| than a negative.
|
| You just listed the positives, without any the negatives, and
| without any sign of actually weighing one against the other.
|
| I don't know if Amazon is a net social positive, but it
| certainly isn't obvious and the answer coudl very well be no
| _despite the positives_.
|
| ps. I helped create Amazon.
| namdnay wrote:
| We'll, those $500 million came from all over the world too, so
| it doesn't seem surprising to see them being spent all over the
| world
| kaesar14 wrote:
| As vile as the robber barons were, at least they were bounded
| by the confines of their environment to care at least a bit
| about their countrymen and have some patriotic tendencies.
| [deleted]
| MomoXenosaga wrote:
| Do we count Africans or the native American tribes?.
|
| We have made some progress.
| cyberlurker wrote:
| Modern day robber barons aren't helping those groups
| either.
| tootie wrote:
| I think compared to the Gilded Age they're doing a 1000x
| better job. Even if it's because they were dragged into
| doing it. It's easy to point out shortcomings, but don't
| ignore progress.
|
| Think of America as a giant venture-funded experiment in
| equality. Even if we're 200 years in without a showing a
| profit, we've had steady revenue growth and loyal
| customers. Profits will come eventually.
| kaesar14 wrote:
| How are they doing a better job?
| papito wrote:
| There is another angle.
|
| https://awealthofcommonsense.com/2021/05/did-hgtv-ruin-the-h...
|
| What if young people burry themselves in debt because they want
| the instagram life _now_? What if they refuse to live according
| to their means?
| iso1631 wrote:
| Vast majority of debt in the US is
|
| Tuition, Housing and Medical
|
| Complaining about avocado toast won't change that
| nostromo wrote:
| The article linked is about housing -- specifically younger
| people buying more house than they can afford.
|
| I'm sure a similar argument could be made about education. I
| personally know a number of people up to their ears in debt
| for advanced degrees that have no economic value.
| MrFantastic wrote:
| The younger people that can qualify to buy a house aren't
| poor.
| papito wrote:
| Medical is one thing - housing and tuition is completely
| self-imposed. I make 6 figures in software but I went to New
| York City College. I graduated with zero debt (in fact, I got
| paid to study).
|
| And I am still renting at 40. Getting an Instagram home takes
| time and saving for decades. It's _always_ been this way.
| micropresident wrote:
| This is caused by credit money. When you issue currency based on
| loans, there's always debt associated. For every dollar saved,
| more than a dollar of liabilities have to exist somewhere.
| Where's it go? People in debt (aka the poor).
| beefield wrote:
| And this, in my humble opinion, is _the_ reason why there has
| been a long term decreasing trend in interest rates for the last
| 40 years. And it will not reverse before the trend of wealth
| distribution getting more and more inequal reverses. So get used
| to the idea of increasing pressure to get functional negative
| interest rates.
| mentos wrote:
| Wouldn't the effect of hoarding wealth be anti inflationary? If
| it's not being spent then it might as well not exist in which
| case it's as if all of the money was confiscated and deleted by
| the government anyways?
| imtringued wrote:
| Hoarding Bitcoin is deflationary. "Hoarding" USD in a bank
| account can be deflationary if there is not enough demand for
| loans or if the borrowed money never reaches the real economy.
| pydry wrote:
| >Wouldn't the effect of hoarding wealth be anti inflationary?
|
| Only if it's being hoarded as cash - something almost nobody
| does.
|
| If it's being hoarded in the form of assets, you'll see rampant
| asset inflation instead.
| Sevii wrote:
| It isn't being hoarded, it is being lent out.
| lurquer wrote:
| Literally hoarding... as in under your mattress? Yes.
|
| Instead, your 'hoarders' are loaning their money to a bank
| which then in turns loans many multiples of that money to
| borrowers.
| hamilyon2 wrote:
| Please explain this one more time to me. I thought banks were
| literally creating money when handing out credit. Banks are
| prohibited to loan money on their saving accounts, so amount of
| credit issued is not directly influenced by amount of money
| saved.
|
| It is rather influenced by regulation on those things.
| whywhywhywhy wrote:
| Until I start hearing arguments on how we can help poorer people
| actual earn more and take home more of their paycheck rather than
| force rich people to earn less I know nothing will ever change.
| [deleted]
| paulpauper wrote:
| _As US income inequality began a marked increase in the 1980s,
| the richest 1 percent of households increased their savings while
| the bottom 90 percent fell into debt. Research finds that lenders
| indirectly used the top 1 percent's savings to finance this
| borrowing, essentially enabling the rich to benefit from the
| bottom 90 percent's debt repayments._
|
| This does not imply causality as the author mistakenly assumes.
| Maybe the bottom 90% have more debt simply because costs are
| rising faster than wages and ability to save. Maybe the rich can
| save more because thy earn more.
| deadwing0 wrote:
| This. I struggle to see how higher savings by the wealthy can
| cause me to take on any more debt. Is the argument the wealthy
| use cash to invest in assets (houses), thus driving up the
| price and causing middle and lower class people to be forced to
| borrow more to buy a house?
| uuidgen wrote:
| Banks, having surplus cash, offer low-monthly-payment loans
| which allows more people to buy them, by the way earning
| 0.6-0.8 * X to the banks.
|
| Since there is a lot of cheap credit price stops constraining
| the demand side. You can get almost arbitrary large loan with
| arbitrary long timespan. This causes prices to rise. Houses
| seem like good investment so wealthy buy them restricting
| supply side, causing prices to rise even higher.
|
| Rising prices make it impossible for most to save for the
| house. They have to take loans.
|
| Now poor people who want house need to pay the inflated price
| + credit fees on top of that. Sellers see their assets rise
| in value, creditors see more customers and more revenue.
|
| If there was no cheap credit then the prices wouldn't rise so
| much because nobody would be buying them.
|
| Now, I don't know how true is all above but that seems to be
| the explanation of the issue I've seen many times.
| kiba wrote:
| But people do want to own homes, but the problems is debt and
| the fact that homes are seen as a way to accumulate wealth.
| Affordable housing clashes with that.
|
| Also, the article seem to treats building a new road as an
| unalloyed good.
| mason55 wrote:
| > _homes are seen as a way to accumulate wealth_
|
| It's worth having a discussion about whether this makes
| sense and is something to strive for.
|
| Unfortunately, because society has been based on this for
| so long, the people who spent their lives paying off a 30
| year mortgage would never agree to make any changes that
| would reduce the value of their house. You'd need to come
| up with a plan to transition away from a house-based model
| of wealth over a long enough period of time where current
| home owners don't get screwed but people know what it means
| to buy a house now.
|
| And I don't think any plan that's long-term enough to be
| sensible could actually survive politics long enough to be
| successfully implemented.
| fancifalmanima wrote:
| I'm definitely speculating, but I could see banks having a
| glut of money to loan contributing to the low interest rates
| that have existed for a while now (thinking of money from a
| supply/demand perspective). With those lower interest rates
| leading to more interest in buying homes and pushing up
| prices (during the subprime crisis, to folks that couldn't
| necessarily afford it). While you'd also expect a housing
| construction boom, its certainly plausible that the industry
| would have to play catch up to demand. (It seems easier to me
| to hire a realtor to go look at homes than to start or expand
| a construction business). Zoning/other regulations can also
| slow down that process. The low interest rates also make
| larger/more expensive homes more feasible for buyers, due to
| the fact that a smaller percentage of the monthly payment is
| interest. I could certainly see ways that the above would
| lead to an individual having a higher debt load than they
| otherwise would.
| imtringued wrote:
| No, nobody is buying your products. Nobody wants to hire you.
| Nobody is investing in a company that will hire you. If you
| have no income you must go into debt. It's that simple.
| js8 wrote:
| Do you think advertisement works? It is certainly possible,
| using advertising, to convince many people that NOW is the
| special time when taking on debt is actually OK, because
| rising house prices lift all boats. (Not really that
| different from any other gold rush..)
|
| Which is what happened before 2008, when there was very
| little oversight in borrowing (e.g. NINJA loans). We know
| empirically that if the lenders are not obligated to make
| sure that the loans can be repayed, predatory lending will
| occur and cause social problems.
| metrix wrote:
| They are not forcing you, it's that the 1% have savings and
| want that savings to make money so it's invested. Portions of
| that investment go into banks who loan out money to the
| middle class.
|
| The middle class uses this money to buy cars/houses which
| helps the 1% to increasing their savings, which they then
| invest a portion of into banks...
|
| BUT like another comment discussed, a lot of this is going
| over seas. Right now this cycle is pushing US asset values
| higher, but at some point this will come crashing down, and
| the money that was invested in under inflated markets will be
| valued correctly/over valued.
|
| At which point that money will flow back into the US.
| dastbe wrote:
| Savings is probably confusing here, because savings change
| based on your socioeconomic position. People go from not
| saving anything, to saving cash, to saving in assets.
|
| Some of these assets have a poorer counterparty who is
| getting access to that money in return for repayment +
| interest. Perversely, the more money is available in these
| assets, the lower the interest rate and so the more money
| these counterparties can borrow. This drives up the cost of
| physical assets being bought with this money, like homes,
| because the value of the home is dictated by the debt load a
| buyer can bear. Lower interest rates means you can support
| more debt, which means someone will take on more debt and
| outcompete you for that house.
| jmholla wrote:
| > This does not imply causality as the author mistakenly
| assumes. Maybe the bottom 10% have more debt simply because
| costs are rising faster than wages and ability to save. Maybe
| the rich can save more because thy earn more.
|
| You can't choose one sentence and refute the whole article
| based on it. It's a part of a whole. The point of the article
| is to make that causal link.
| rsj_hn wrote:
| The one sentence is representative of a lack of causal
| arguments and the use of whimsical speculation to replace
| providing evidence for said casual arguments.
|
| I could argue that liberalization of global capital flows
| allowed significant foreign investment leading to an
| abnormally low interest rate regime, which is why _everyone_
| (rich and poor) has taken on more debt, and I guarantee you
| that the rich take on far more debt than the poor. But as the
| poor tend to have mostly human capital on their balance sheet
| while the rich have assets, it creates an appearance that the
| poor have _net_ debt (which they do not) while the rich have
| net assets (which they do). In fact both the poor and rich
| are solvent -- have more assets than debt, but the assets of
| the poor are future wage earnings. Thus in any reduction of
| interest rates, the poor will disproportionately benefit over
| the rich and will take advantage of this to increase
| borrowing.
|
| E.g. if you are rich then both your assets and your
| liabilities will grow in lockstep (at the macro level). But
| if you are poor, then your assets are your wages which do not
| grow in lockstep with interest rates. Thus a reduction of
| interest rates disproportionately helps the poor to borrow
| more but an increase disproportionately hurts their ability
| to borrow. These are just some of the interesting effects
| when you seriously look at debt-dynamics and interest
| regimes. But in no regime can you make a case that the mere
| existence of the rich somehow causes the poor to borrow.
|
| Yet the reason for low interest rates and the fact that such
| low rates are responsible for both the behavior of the rich
| and poor are not covered in this piece. In fact it used to be
| the case that Rebecca's predecessors would bemoan the fact of
| how the poor were locked out of credit markets and thus
| unable to participate in the wealth-creating business of
| taking on debt to purchase long-lived assets, and thus they
| had to rent an apartment instead of being able to buy a
| house, or could not borrow to get a more reliable car on
| credit, etc. Now that those barriers have been substantially
| reduced, there is lots of hand-wringing about how the poor
| are taking on debt. This amnesia is funny to those of us who
| have been following this debate from times when rates were
| much higher and the poor borrowed very little. Then the
| complaint was "why are the rich locking the poor out of
| credit markets?" Resentment can be stoked in any situation.
| It is particularly hilarious because Keynes advocated for
| lowering interest rates in order to "euthanize the rentier"
| and he blamed the rentier class for keeping rates higher than
| they should have been. E.g. he blamed the rich for high
| interest rates. Now the argument is that rich are to blame
| for low interest rates. Keynes would be rolling over in his
| grave. But the persistent theme seems to be that the rich are
| to be blamed.
|
| In fact there is nothing wrong with taking on debt. What
| matters is your ability to service the debt, and in a low
| interest rate regime, that service capacity is substantially
| increased, and thus so are debt levels. Perhaps this is not
| worth the trade off of increased financial fragility. Or
| perhaps it is -- data must be required and real arguments
| made. But merely the existence of the debt levels themselves
| -- again held both by poor and rich -- are not something to
| be avoided.
|
| This blog post doesn't attempt to engage with any of this
| literature or provide any fact-based arguments about casual
| mechanisms or whether something is beneficial or harmful.
| It's just more hand-wringing, which is a shame as debt-
| dynamics, interest rate regimes, global investment flows and
| credit constraints are important topics that deserve to be
| treated seriously rather than as a political football in the
| resentment olympics.
| majormajor wrote:
| > This does not imply causality as the author mistakenly
| assumes. Maybe the bottom 90% have more debt simply because
| costs are rising faster than wages and ability to save. Maybe
| the rich can save more because thy earn more.
|
| If it's easier to borrow money, costs will go up. Look at
| college education over the past half century, or housing vs
| interest rates.
|
| So if some people start taking on more debt than they should
| because it's easier, a lot of other people are pushed into it
| even if they wouldn't have originally when they're priced out
| by the borrowers.
| imtringued wrote:
| >Maybe the bottom 90% have more debt simply because costs are
| rising faster than wages and ability to save.
|
| You just rephrased the article. What you are saying is
| identical to what the article said.
|
| If companies don't borrow money from the wealthy and don't
| spend their money on hiring people or higher wages then then
| there are unemployed people who must (emphasis on must) consume
| (think of food and rent) in excess of their income because
| their income is 0 and the only way they can keep consuming is
| by going into debt. Therefore what you and the article said is
| the same thing.
| pmoriarty wrote:
| _" Maybe the rich can save more because thy earn more."_
|
| That's certainly a big part of it, but far from the only one.
|
| When you're living paycheck to paycheck you have no money to
| invest, so the poor are usually limited to earning only as much
| as their poorly paying jobs will pay them, while the salaries
| of the rich usually only make up a small to non-existent
| portion of their wealth.
|
| On top of that, at least in the US, capital gains are taxed at
| a much lower rate than income, so those whose income makes up a
| large fraction of what they earn are doubly screwed.
|
| For the really poor, food expenses are a significant portion of
| their expenses, and yet many of them live in food deserts where
| food is not only less nutritious and less varied than what the
| rich have access to, but that food is often more expensive.
|
| If as a poor person you have to take out a payday loan to get
| by, you're also going to be paying through the nose for that.
|
| Predatory lending practices are also widely employed against
| the poor.
|
| If you can't afford your own home (or to own a home but never
| pay it off), you could wind up paying way more in rent or
| mortgage payments than if you had bought a home outright in
| cash and never had to pay any interest on it at all.
|
| That's not to mention medical expenses, which often bankrupt
| people in America... or legal expenses, which the poor often
| can't afford and wind up going to jail because of.
|
| Finally, its the wealthy and powerful who write the laws and
| and use their connections in and various forms of bribes of
| government to favor mostly themselves, their friends and
| families. The poor do not have this sort of pull, and are often
| led by the nose by the rich to vote against their own
| interests.
| [deleted]
| PaulDavisThe1st wrote:
| Is it just me, or is Chicago Booth beginning to publish more pop-
| econ articles that question the simplistic reality of the so-
| called "Chicago School of Economics" ?
| jfrunyon wrote:
| > After all, a yacht is rooted in the real economy. A good chunk
| of the money originally spent on the yacht went to pay workers
| and buy equipment
|
| Sure. And then the rest of it went to profit. Knowing the yacht
| is 454 ft (what's the sqft on that? four digits?), costs $590m,
| and yet a tricked-out 66,000 sqft megamansion-ranch-thing is
| worth less than a quarter of that
| [https://www.latimes.com/business/story/2021-05-04/bill-
| gates...], I'm gonna take a guess that there's a loooooot of
| profit in that yacht. Which means that it's just 1%ers passing
| money around amongst themselves.
|
| (Yes, I'm comparing apples and oranges here a bit, but I really
| have to question how much of that is going to materials and
| labor...)
| [deleted]
| jfrunyon wrote:
| Fair enough - I figured for multiple floors, but I honestly
| had absolutely no clue what the width would be like.
| bugzz wrote:
| I'd say the real "problem" with spending on yachts and other
| luxuries is that it takes real value to make - skilled
| labourers and valuable materials going to something that
| doesn't provide that much human happiness. Not saying the ultra
| rich shouldn't be allowed to spend their money how they want,
| just that it does seem to have consequences to me.
| wahern wrote:
| This was explained better by Michael Pettis in "The U.S. Trade
| Deficit Isn't Caused by Low American Savings",
| https://carnegieendowment.org/chinafinancialmarkets/77009
|
| > [I]f savings are already plentiful and interest rates are low,
| to the extent that all desired investment has been funded, U.S.
| investment wouldn't rise. If the gap between U.S. investment and
| U.S. savings is unchanged (and investment doesn't rise), then
| savings cannot rise. This means that policies designed to raise
| U.S. savings by $20 can only cause savings in one part of the
| economy to rise by $20 while simultaneously causing savings in
| another part to decline by exactly the same amount.
|
| The more abstract point is that _but_ _for_ government borrowing
| (both Federal, state, and municipal) soaking up the glut of cash
| and redistributing it, unemployment would progressively increase.
| Pettis ' policy argument is that, given this situation (current
| account surplus), government spending should focus on inducing
| consumption rather than investment as the supply-side of the
| equation is manifestly maxed out.
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