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The interplay between wealth and income is a hard one to navigate, but I think important. Part of the economic story of the last generation (IMO) is embedded i
by dalbasal 9y ago
The interplay between wealth and income is a hard one to navigate, but I think important.
Part of the economic story of the last generation (IMO) is embedded in this interplay. Financialization is largely the process of turning future income into current assets. EG, I buy a house, get a house and a mortgage. My wealth is net 0. One house owned. One house-value owed. Part of my future income is now someone else's current asset. They also net to 0 change (mirroring my balance sheet). Yet obviously, something somewhere has changed.
Lending and creating money are interlinked, as is inflation. Monetarists tend towards macroeconomic thinking, and default to regarding of inflation as a single thing. In reality, inflation is microeconomic. More real estate lending, higher real estate prices. Also, "inflation" as an actual phenomenon is not simply devaluation. It is all price and market size increases, including increases in "quality and quantity". More real estate lending, more/bigger houses. Another striking example is american universities. More student loans, more expensive tuition, fancier uni experiences, more students. All that is "inflation" in the "consequences of money supply^" sense.
Another aspect that I would be interested in seeing approached is "inflation by income level." I suspect that this is increasingly important, especially because of housing cost fluctuations and trends. If 40% of your income is spent on housing, a 25% increase in house prices represents 10% inflation assuming all other prices remain constant. Similar calculation for college and such. Your inflation could be 5% pa, while the average inflation is 0%. This is happening now where I live. People's spending habits are very dependant by social-wealth class, so I think it would be worth trying to generate class specific inflation rates. I expect income inequality growth would look faster this way.
^I'm alluding to Firedman's "Inflation is always and everywhere a monetary phenomenon" though I've defined inflation differently to the macroeconomic/monetarist standard which explicitly excluded increases in "quality and quantity." I think it still holds, as long as you swap "always" with "often" which might even be necessary for Milton's.
- dnautics 9y agoWell I think both of you are right. Inflation starts as a monetary phenomenon but it's net effects are not always monetary. Inflation is a policy choice, not a 'feature of the universe'.
- dalbasal 9y agoIt's sort of a policy choice. But, I think money creation and fiat currency is poorly understood. Even in a metal backed currency world, you still have money creation through lending. Money creation is a feature of lending, not just fiat currency printing. But in that world, currency value is fixed via metal redemption. So, the amount of money in an economy will still expand to 5-20 times the amount of metal, with the specific amount varying as lending expand and contracts. IMO, this makes "hard" currency more unstable than fiat currency in developed countries. Bank runs are less of a problem. In terms of me and Milton… he’s the nobel prize winning economist and I’m a forum commenter. I just defined my own “inflation,” I’m calling it microeconomic inflation until someone who knows a different name for it says otherwise. I'm basically saying is that money is not just money, it's not as fungible as it seems. Money supply is basically determined by lending. More loans, more money. In practice, lending is earmarked. So, we have multiple money types. Mortgage supply = housing money, student loans = college money. So, we end up with multiple types of money. Money supply can go up in certain markets, so inflation is uneven.
- dnautics 9y agoyou do still have money creation through lending but i think that risk tolerance is a limited resource and has a fixed upper limit. If you are too tolerant of risk, your assets will snap back during a business cycle or war or solar flare or asteroid strike or whatever, and the money muliplier will regress to the steady state average.
- ctdonath 9y agoI buy a house, get a house and a mortgage. My wealth is net 0. One house owned. One house-value owed. Need to consider temporal dimension: a house is owned because I'm already converting my future income into a house. There's a difference between "net $0 now because I'm borrowing from my substantial cumulative future creation of wealth" vs "net $0 now because I'm not productive and won't be".
- dalbasal 9y agoYeah, I think I may have written that badly. The temporal aspect is what makes it hard, but it's what I was trying to comment on. Wealth now and income later are effectively fungible, in todays world to a much greater extent than the past. This includes negative wealth (debt).