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It's not as if wealthy people take their money and put it under their mattress. No, they invest it. That investment money flows to other corporations who then s

by owyn 11y ago

It's not as if wealthy people take their money and put it under their mattress. No, they invest it. That investment money flows to other corporations who then spend it on goods and services, or spend it on their employees. No they don't. From what I've read (Piketty etc) they do not re-circulate it into the general economy. They use investment vehicles which are increasingly divorced from "real world" economics and more like moving chips around on a poker table. It's wealth in the service of wealth creation. All of that happens in an almost separate level of the economy. No poor or middle class person is even involved. I'd "hazard a guess" that wealthy investors might be more effective at creating more wealth, but not at raising the standard of living of the countries they are in. In fact, the standard of living in the United States is declining. Approximately 100% of the money that poor and middle class people spend goes to corporations. If you give them money, they spend it on goods and services. That's pretty efficient. The alternative, if you tax the rich, is that the same money flows to the government and the government spends it on programs. Is that the only alternative? At this point, probably. I don't trust the government either, it's a bloated plutocracy. But you could still make a completely economic/utility theory argument that the benefit to 100M+ people outweighs the overall good for the 1K+ people at the top of the current hierarchy.

Pyxl101 11y ago
> They use investment vehicles which are increasingly divorced from "real world" economics and more like moving chips around on a poker table. Which investment vehicles are those? You cannot in general invest money into vehicles which earn a good return but which are divorced from the real world. Imagine if you invest in a company like Apple. Apple developed products like the iPod and iPhone, and the company's value comes from the fact that 500 million people gave their money to Apple in exchange for an iPhone. Apple's $233 billion dollar revenue, and resulting net income, leads to their valuation, which leads to the return on our hypothetical investment. The investment profits because Apple developed a useful product that people chose to spend money on - the people who bought the products benefited, and the investor benefited from a return. Everyone is better off, and the standard of living has risen. Technology makes things cheaper over time, so that more people can afford such devices. A vast majority of people living in poverty in America own cell phones. Can you describe how these investment vehicles work such that they're earning a return while being disconnected from the real world? Where does the money come from for the returns?
- Mikeb85 11y ago
  > Which investment vehicles are those? Hedge funds and the like. > leads to their valuation, which leads to the return on our hypothetical investment. 'Return' on an increase in valuation isn't a real return. It's exactly like poker. The way markets are supposed to work is you invest in an IPO, then you get a dividend sometime in the future, and then maybe the company buys back your shares. The way it generally works for most people is you buy shares on the open market, then someone else buys those shares from you. This has nothing to do with the 'reality' of the company because both of you are speculators, neither has given money to the company, and neither has received money from the company. You're both just playing with poker chips. > Can you describe how these investment vehicles work such that they're earning a return while being disconnected from the real world? Where does the money come from for the returns? You buy into the market (non-IPO). When the value goes up, you sell. You're selling to other investors. So the answer is, much of the money for the returns comes from other investors (not unlike a Ponzi scheme, however since you're both speculating, it's more akin to a poker table). On a large scale the way it works is that hedge funds and traders are the ones making money, at the expense of less sophisticated traders, like mutual funds, pension funds, and retail traders. Of course, this doesn't include the fact the dividends and buybacks actually are real, and do represent a non-trivial portion of the market, but there certainly is a large enough amount of investment vehicles which are divorced from the 'real world'.
  - rahimnathwani 11y ago
    The analogy with poker is a poor one. Poker is a zero-sum game. Capital markets are not zero sum. Capital allocation can create (or destroy) wealth, and the transactions to which you point make that process more efficient. If there were no secondary market for shares, there would less money invested in IPOs and other primary investments.
  - Pyxl101 11y ago
    > 'Return' on an increase in valuation isn't a real return. It's exactly like poker. Completely false. Let's talk about how investment money is used, and how that impacts valuation. Say that a friend has started a new farm as a business and he's seeking investment. He'd like a cash investment in order to buy a tractor, harvester, and combine for the farm, which he can't afford himself. So I make the investment and the farm buys the equipment, which enables the farm to grow substantially more crops (vs tilling, planting, and harvesting by hand). By growing more crops with that equipment, the farm has vastly more revenue and earnings. This farm has actually grown more crops than it could have otherwise - the investment led to the creation of wealth. The crops are net additional wealth, and the farm's ability to grow and sell them for revenue leads directly to the increase in the farm's valuation. The farm grows and hires more employees; it's also an engine of job creation. All made possible by the investment, without which the farm could not have gotten started. > Hedge funds and the like. And what do hedge funds do with the investment money they receive from the wealthy? Do they put that cash under their mattress and somehow generate returns by doing that? No, they invest it in companies which use the cash to create wealth.
analog31 11y ago
I wonder if this explains why the money supply is increasing without any accompanying inflation. The money is just getting turned into economic dead weight.
- Tycho 11y ago
  I think it's fairly well established that money supply increase has led to asset price inflation (but not consumer price inflation like you said), but that has also meant bond yields have stayed low, letting companies and countries borrow cheaply to fund their various projects. So I don't think 'dead weight' is the correct description. Of course, it may have had other, less pleasant, effects.
walshemj 11y ago
Erm in that case why do the Rothschilds run RIT Capital Partners - which is explicitly set up to allow non family members to invest (as I do )
yummyfajitas 11y ago
Picketty explicitly claims the opposite of this. According to Picketty, the rich invest in the economy and achieve a growth rate r. As a result the level of capital stock grows more rapidly than incomes (which grow only at the rate g, for r > g). In contrast, money spent on consumption does not grow at the rate r. Picketty even speculates (providing no real evidence however) that only the rich can achieve growth rate r - investments by others will only achieve r' < r. Did you even read Picketty? (The math parts, not the mood affiliation.)
- owyn 11y ago
  I shouldn't have name dropped that particular book since I haven't read it, only summaries/reviews of it. But the question still remains of how "rich people invest in the economy". Do they really? Or is it entirely indirect? Not one of them is giving small farmers money to buy tractors. Maybe they're building hotels which eventually employ housekeepers, sure. That's what I think of as the general economy. There's probably a more specific technical term for this. But I think using a billion dollars to give small farmers loans would be the worst possible use for it. You'd probably speculate in oil futures or whatever. While it's technically all the economy, sure, I'd argue that the super-wealthy generally don't add much to the economy, they extract value from the economy using their existing wealth as leverage. What I'm getting at is that money spent on stuff/food/buildings/etc is different than money used as a tool/leverage/instrument just to make more money. I get the sense that it's an entirely different game (again, mostly an intuition from reading a lot of commentary about economic issues). Sure, we all earn money and pay rent in dollars. Those dollars and that activity are only tangentially related to what a hedge fund uses dollars for.
  - yummyfajitas 11y ago
    According to Piketty, rich people invest secretly into large mysterious companies. This pretty much precludes public markets, so they probably own lots of smaller businesses (e.g. hotels). Why do you believe lending to farmers is a bad use for resources? Investing in oil futures is transmitting information to the markets. It encourages current users to avoid unnecessary use of oil and produces to produce more. That's a valuable service. What exactly do you think a hedge fund does?

by owyn 11y ago

Pyxl101 11y ago

> They use investment vehicles which are increasingly divorced from "real world" economics and more like moving chips around on a poker table. Which investment vehicles are those? You cannot in general invest money into vehicles which earn a good return but which are divorced from the real world. Imagine if you invest in a company like Apple. Apple developed products like the iPod and iPhone, and the company's value comes from the fact that 500 million people gave their money to Apple in exchange for an iPhone. Apple's $233 billion dollar revenue, and resulting net income, leads to their valuation, which leads to the return on our hypothetical investment. The investment profits because Apple developed a useful product that people chose to spend money on - the people who bought the products benefited, and the investor benefited from a return. Everyone is better off, and the standard of living has risen. Technology makes things cheaper over time, so that more people can afford such devices. A vast majority of people living in poverty in America own cell phones. Can you describe how these investment vehicles work such that they're earning a return while being disconnected from the real world? Where does the money come from for the returns?

Mikeb85 11y ago
> Which investment vehicles are those? Hedge funds and the like. > leads to their valuation, which leads to the return on our hypothetical investment. 'Return' on an increase in valuation isn't a real return. It's exactly like poker. The way markets are supposed to work is you invest in an IPO, then you get a dividend sometime in the future, and then maybe the company buys back your shares. The way it generally works for most people is you buy shares on the open market, then someone else buys those shares from you. This has nothing to do with the 'reality' of the company because both of you are speculators, neither has given money to the company, and neither has received money from the company. You're both just playing with poker chips. > Can you describe how these investment vehicles work such that they're earning a return while being disconnected from the real world? Where does the money come from for the returns? You buy into the market (non-IPO). When the value goes up, you sell. You're selling to other investors. So the answer is, much of the money for the returns comes from other investors (not unlike a Ponzi scheme, however since you're both speculating, it's more akin to a poker table). On a large scale the way it works is that hedge funds and traders are the ones making money, at the expense of less sophisticated traders, like mutual funds, pension funds, and retail traders. Of course, this doesn't include the fact the dividends and buybacks actually are real, and do represent a non-trivial portion of the market, but there certainly is a large enough amount of investment vehicles which are divorced from the 'real world'.
- rahimnathwani 11y ago
  The analogy with poker is a poor one. Poker is a zero-sum game. Capital markets are not zero sum. Capital allocation can create (or destroy) wealth, and the transactions to which you point make that process more efficient. If there were no secondary market for shares, there would less money invested in IPOs and other primary investments.
- Pyxl101 11y ago
  > 'Return' on an increase in valuation isn't a real return. It's exactly like poker. Completely false. Let's talk about how investment money is used, and how that impacts valuation. Say that a friend has started a new farm as a business and he's seeking investment. He'd like a cash investment in order to buy a tractor, harvester, and combine for the farm, which he can't afford himself. So I make the investment and the farm buys the equipment, which enables the farm to grow substantially more crops (vs tilling, planting, and harvesting by hand). By growing more crops with that equipment, the farm has vastly more revenue and earnings. This farm has actually grown more crops than it could have otherwise - the investment led to the creation of wealth. The crops are net additional wealth, and the farm's ability to grow and sell them for revenue leads directly to the increase in the farm's valuation. The farm grows and hires more employees; it's also an engine of job creation. All made possible by the investment, without which the farm could not have gotten started. > Hedge funds and the like. And what do hedge funds do with the investment money they receive from the wealthy? Do they put that cash under their mattress and somehow generate returns by doing that? No, they invest it in companies which use the cash to create wealth.

analog31 11y ago

I wonder if this explains why the money supply is increasing without any accompanying inflation. The money is just getting turned into economic dead weight.

Tycho 11y ago
I think it's fairly well established that money supply increase has led to asset price inflation (but not consumer price inflation like you said), but that has also meant bond yields have stayed low, letting companies and countries borrow cheaply to fund their various projects. So I don't think 'dead weight' is the correct description. Of course, it may have had other, less pleasant, effects.

walshemj 11y ago

Erm in that case why do the Rothschilds run RIT Capital Partners - which is explicitly set up to allow non family members to invest (as I do )

yummyfajitas 11y ago

Picketty explicitly claims the opposite of this. According to Picketty, the rich invest in the economy and achieve a growth rate r. As a result the level of capital stock grows more rapidly than incomes (which grow only at the rate g, for r > g). In contrast, money spent on consumption does not grow at the rate r. Picketty even speculates (providing no real evidence however) that only the rich can achieve growth rate r - investments by others will only achieve r' < r. Did you even read Picketty? (The math parts, not the mood affiliation.)

owyn 11y ago
I shouldn't have name dropped that particular book since I haven't read it, only summaries/reviews of it. But the question still remains of how "rich people invest in the economy". Do they really? Or is it entirely indirect? Not one of them is giving small farmers money to buy tractors. Maybe they're building hotels which eventually employ housekeepers, sure. That's what I think of as the general economy. There's probably a more specific technical term for this. But I think using a billion dollars to give small farmers loans would be the worst possible use for it. You'd probably speculate in oil futures or whatever. While it's technically all the economy, sure, I'd argue that the super-wealthy generally don't add much to the economy, they extract value from the economy using their existing wealth as leverage. What I'm getting at is that money spent on stuff/food/buildings/etc is different than money used as a tool/leverage/instrument just to make more money. I get the sense that it's an entirely different game (again, mostly an intuition from reading a lot of commentary about economic issues). Sure, we all earn money and pay rent in dollars. Those dollars and that activity are only tangentially related to what a hedge fund uses dollars for.
- yummyfajitas 11y ago
  According to Piketty, rich people invest secretly into large mysterious companies. This pretty much precludes public markets, so they probably own lots of smaller businesses (e.g. hotels). Why do you believe lending to farmers is a bad use for resources? Investing in oil futures is transmitting information to the markets. It encourages current users to avoid unnecessary use of oil and produces to produce more. That's a valuable service. What exactly do you think a hedge fund does?