4 ms·

Real interest rates are basically the "price of capital". The question is: is it the demand side that is weakening (i.e. there are fewer and fewer worthwhile pr

by Hermel 8y ago

Real interest rates are basically the "price of capital". The question is: is it the demand side that is weakening (i.e. there are fewer and fewer worthwhile projects with reasonable returns) or is it the supply of capital that has grown (i.e. more and more people seeking to invest their capital)?

tomrod 8y ago
Supply of capital increases can be: 1. More people (as you state), which is likely to happen in a growing population with wealth equality. 2. More capital per person engaged in the capital market, also grows with population but at a slower rate -- this is a more likely outcome in markets overlapping areas of high wealth inequality. If you have 3X increase in the amount of capital seeking funds, the risk aversion of the median participant is going to be very different in each of those scenarios, and therefore dictate relative rates. These days, the common wisdom is to pay into a huge fund of money (401(k) and similar into index funds) which mitigates a lot of the individual risk to investors.
maxerickson 8y ago
There's also just more capital in the world per person, it isn't just a matter of a larger population.
nabla9 8y ago
It's a good question. Capital intensity (aka "capital deepening") is the is the ratio of capital needed in relation to other factors of production. The long term trend seems to be that capital intensity is growing. Increasing capital intensity increases the the productivity of labor even if the worker is not "more productive" in the sense the term is commonly understood. Factory that replaces 1000 workers in a manufacturing line with 10 workers looking monitors all day long higher labor productivity because they produce more GDP per hour worked. This is probably one of the reasons why productivity increase is not transferring fully into wage increase (wage share is decreasing). Capital intensity growing would increase the return of capital if everything else would stay the same. But if people are paid less, they consume less. If the household final consumption expenditure deceases, government final consumption expenditure (or NGO's) must take the slack or final demand decreases and capital gains decrease. In a closed economy (or import export balance): wages + other benefits + taxes => demand that produces capital gains in the private sectors. It's impossible to say how it turns to be unless you know the relevant coefficients.
- eru 8y ago
  Please keep in mind that capital's share of GDP hasn't actually increased. Land is the boogeyman.
  - nabla9 8y ago
    Property is a capital expenditure.
    - eru 8y ago
      We can make more capital. We can't make more land. (In the general sense. We can turn some ocean floor into land, but that doesn't really make much of a difference.)
- dnomad 8y ago
  There's no reason to choose. This is the logical conclusion of runaway inequality: less consumption and oversupply of capital (aka financialization). In real terms, outside of the big three (education, real estate, and healthcare) we're seeing a great deal of demand destruction. Millennials are buying less of everything -- food, entertainment, clothing, transportation, and even babies. All the while the labor pool shrinks and shrinks ensuring the low demand becomes structural. On the supply side increasingly concentrated capital has no choice but to chase after any and every growth opportunity no matter how wacky. The whole thing is self-reinforcing in a kind of three body problem: low effective wages and big debts (student loans, mortgages) drive less consumption and low interest rate drive increasing asset prices drive wacky investments in bitcoin/real estate/education/healthcare ... which drive low effective wages and big debts. All of this was predicted by Marx and isn't terribly surprising. The surprising thing here is that the new peasants are able to consume so little without owning land. The price of food and clothing and a lot of consumer technology has collapsed. Seems like most entertainment is either free or Netflix-style subscription (too cheap to meter). By some estimates [0] Millenials are spending just $20/day! The crashing birth rates are the future's problem and the growing political unrest and populism is unlikely to lead to anything but twitter fights. (It's possible it might lead to thermonuclear war but we're assuming nobody's stupid enough to press the button.) In the end there's really no need for global communist revolution if we can all get fat off junk food and keep each other entertained with youtube. [0] http://www.businessinsider.com/millennials-genz-spending-less-2017-9 http://www.businessinsider.com/millennials-genz-spending-les...
tankenmate 8y ago
One way to test this is with data that has sufficient random walks (say for example daily open and close prices over several decades) and use the additive noise method (ANM)[0] to determine if noise from one correlator affects noise in the other (and hence one causes the other). https://arxiv.org/abs/1412.3773 https://arxiv.org/abs/1412.3773
crdoconnor 8y ago
Both are true. Wealth inequality will naturally lead to an overabundance of capital (rich people with more money who invest more than they spend) and weakening aggregate demand (poor people spend less because they have less money).
BenoitEssiambre 8y ago
This is an interesting question but I think you've got the terms reversed. This question should read: "Real interest rates are basically the "return on capital". The question is: is it the supply side that is weakening (i.e. there are fewer and fewer worthwhile projects with reasonable returns) or is it the demand for capital that has grown (i.e. more and more people seeking to invest their savings in capital)?"
mabbo 8y ago
I wonder if the pension funds, 401Ks, and large retirement savings of the baby boom generation is playing a role. There is a lot of supply for investment out there today. Now the children of the baby boom are having a hard time saving. What will happen in 30 years when they all have little saved to retire on (or invest with)? Might be a different situation.
randomdata 8y ago
> there are fewer and fewer worthwhile projects with reasonable returns Or the projects now require less capital? The industrial revolution relied on machines and processes that were incredibly capital intensive. In today's dollars, you could easily spend millions of dollars just to get started. In the information revolution, a thousand dollar computer can set you down to road to a very successful enterprise. As such, there is lower demand for capital.

by Hermel 8y ago

tomrod 8y ago

Supply of capital increases can be: 1. More people (as you state), which is likely to happen in a growing population with wealth equality. 2. More capital per person engaged in the capital market, also grows with population but at a slower rate -- this is a more likely outcome in markets overlapping areas of high wealth inequality. If you have 3X increase in the amount of capital seeking funds, the risk aversion of the median participant is going to be very different in each of those scenarios, and therefore dictate relative rates. These days, the common wisdom is to pay into a huge fund of money (401(k) and similar into index funds) which mitigates a lot of the individual risk to investors.

maxerickson 8y ago

There's also just more capital in the world per person, it isn't just a matter of a larger population.

nabla9 8y ago

It's a good question. Capital intensity (aka "capital deepening") is the is the ratio of capital needed in relation to other factors of production. The long term trend seems to be that capital intensity is growing. Increasing capital intensity increases the the productivity of labor even if the worker is not "more productive" in the sense the term is commonly understood. Factory that replaces 1000 workers in a manufacturing line with 10 workers looking monitors all day long higher labor productivity because they produce more GDP per hour worked. This is probably one of the reasons why productivity increase is not transferring fully into wage increase (wage share is decreasing). Capital intensity growing would increase the return of capital if everything else would stay the same. But if people are paid less, they consume less. If the household final consumption expenditure deceases, government final consumption expenditure (or NGO's) must take the slack or final demand decreases and capital gains decrease. In a closed economy (or import export balance): wages + other benefits + taxes => demand that produces capital gains in the private sectors. It's impossible to say how it turns to be unless you know the relevant coefficients.

eru 8y ago
Please keep in mind that capital's share of GDP hasn't actually increased. Land is the boogeyman.
- nabla9 8y ago
  Property is a capital expenditure.
  - eru 8y ago
    We can make more capital. We can't make more land. (In the general sense. We can turn some ocean floor into land, but that doesn't really make much of a difference.)
dnomad 8y ago
There's no reason to choose. This is the logical conclusion of runaway inequality: less consumption and oversupply of capital (aka financialization). In real terms, outside of the big three (education, real estate, and healthcare) we're seeing a great deal of demand destruction. Millennials are buying less of everything -- food, entertainment, clothing, transportation, and even babies. All the while the labor pool shrinks and shrinks ensuring the low demand becomes structural. On the supply side increasingly concentrated capital has no choice but to chase after any and every growth opportunity no matter how wacky. The whole thing is self-reinforcing in a kind of three body problem: low effective wages and big debts (student loans, mortgages) drive less consumption and low interest rate drive increasing asset prices drive wacky investments in bitcoin/real estate/education/healthcare ... which drive low effective wages and big debts. All of this was predicted by Marx and isn't terribly surprising. The surprising thing here is that the new peasants are able to consume so little without owning land. The price of food and clothing and a lot of consumer technology has collapsed. Seems like most entertainment is either free or Netflix-style subscription (too cheap to meter). By some estimates [0] Millenials are spending just $20/day! The crashing birth rates are the future's problem and the growing political unrest and populism is unlikely to lead to anything but twitter fights. (It's possible it might lead to thermonuclear war but we're assuming nobody's stupid enough to press the button.) In the end there's really no need for global communist revolution if we can all get fat off junk food and keep each other entertained with youtube. [0] http://www.businessinsider.com/millennials-genz-spending-less-2017-9 http://www.businessinsider.com/millennials-genz-spending-les...

tankenmate 8y ago

One way to test this is with data that has sufficient random walks (say for example daily open and close prices over several decades) and use the additive noise method (ANM)[0] to determine if noise from one correlator affects noise in the other (and hence one causes the other). https://arxiv.org/abs/1412.3773 https://arxiv.org/abs/1412.3773

crdoconnor 8y ago

Both are true. Wealth inequality will naturally lead to an overabundance of capital (rich people with more money who invest more than they spend) and weakening aggregate demand (poor people spend less because they have less money).

BenoitEssiambre 8y ago

This is an interesting question but I think you've got the terms reversed. This question should read: "Real interest rates are basically the "return on capital". The question is: is it the supply side that is weakening (i.e. there are fewer and fewer worthwhile projects with reasonable returns) or is it the demand for capital that has grown (i.e. more and more people seeking to invest their savings in capital)?"

mabbo 8y ago

I wonder if the pension funds, 401Ks, and large retirement savings of the baby boom generation is playing a role. There is a lot of supply for investment out there today. Now the children of the baby boom are having a hard time saving. What will happen in 30 years when they all have little saved to retire on (or invest with)? Might be a different situation.

randomdata 8y ago

> there are fewer and fewer worthwhile projects with reasonable returns Or the projects now require less capital? The industrial revolution relied on machines and processes that were incredibly capital intensive. In today's dollars, you could easily spend millions of dollars just to get started. In the information revolution, a thousand dollar computer can set you down to road to a very successful enterprise. As such, there is lower demand for capital.