7 ms·

I'm a layman when it comes to economics, so take my opinion with a grain of salt. The way I think about it is, when the Fed "creates" like this, who actually ge

I'm a layman when it comes to economics, so take my opinion with a grain of salt. The way I think about it is, when the Fed "creates" like this, who actually gets it? Well, it's the person who holds the asset the Fed will buy. Those assets (like bonds) are held primarily by the wealthy. The wealthy already have enough money to do the things they want and most of the time it's about watching the number in the account go up. What I mean is, it seems like there are two economies. The economy where the wealthy* buy things. Things like art, yachts, houses in coastal cities, stocks, bonds, fancy education, fine collectables, fancy cars, fancy clothes. And the economy where the normal people buy their normal things like TVs, cell phones, commercial air travel, food, normal clothes. So when the wealthy* get money for their assets from the Fed, they aren't really buying the same things normal people are buying. So inflation so far has not crept into normal things. It has crept into wealthy* people things, a lot. Of course there is bleed-over, like housing and education and medicine, where inflation is showing up because the wealthy* and the normal people compete for the same resources or similar types of resources. So when you're talking about purchasing power, are you referring to living a normal life or a wealthy* life? If it's the former, the current CPI seems like not a big problem.

alexpetralia 6y ago
Yes, though this also affects many people who have retirement accounts and pensions. The difference is primarily between those who derive their income from capital (the financial economy) and those who derive it mostly from labor (the real economy).
- sideshowb 6y ago
  Yeah, this. Can't speak for the US but in the UK most of the middle class (at a guess around 50% of the population) has at least some* of their retirement savings in pension funds which rely on capital growth to fulfill their intended purpose. *most of the rest being in house prices to which the same applies in part.
- DrAwdeOccarim 6y ago
  I kind of agree, but again me ≠ economist. I've found value in looking at the median reitrement account value of Americans. I say median, because the wealthy* skew the mean and so it's not valuable. https://dqydj.com/retirement-savings-by-age-united-states/ https://dqydj.com/retirement-savings-by-age-united-states/ So this tells us the average person who is retired or approaching retirement, has about $40,000 of retirement savings. If that went down to $20,000 (50% drop in total market) would that change their normal person lifestyle a lot? I would say no, because CPI is pretty low and prices are pretty low for things normal people buy. It shows the inflation in asset prices seem to be detached from reality.
JackMorgan 6y ago
I suspect this is much more true than people have ever even considered before. The metaphor of "two economies" makes a whole lot of sense in a lot of ways.
- bob33212 6y ago
  The conversation about money between Frank and Charlie in this episode highlight the different ways the two groups think about the economy https://itsalwayssunny.fandom.com/wiki/Frank%27s_Back_in_Business https://itsalwayssunny.fandom.com/wiki/Frank%27s_Back_in_Bus...
sparkie 6y ago
The economies are not separate. The essence of what you described is what was laid out by Cantillon, in what is now known as the "Cantillon effect"[1] > "If the increase of hard money comes from gold and silver mines within the state, the owner of these mines, the entrepreneurs and smelters, refiners, and all the other workers will increase their expenses in proportion to their profits. Their households will consume more meat, wine, or beer than before. They will become accustomed to wearing better clothes, having finer linens, and having more ornate houses and other desirable goods. Consequently, they will give employment to several artisans who did not have that much work before and who, for the same reason, will increase their expenditures. All this increased expenditures on meat, wine, wool etc., necessarily reduces the share of the other inhabitants in the state who did not participate at first in the wealth of those mines in question. The bargaining process of the market, with the demand for meat, wine, wool etc., being stronger than usual, will not fail to raise the prices. These high prices will encourage farmers to employ more land to produce the following year, and these same farmers will profit from the increased prices and will increase their expenditure on their families like the others. Those who will suffer from these higher prices and increased consumption will be, first of all, property owners, during the term of their leases, and then domestic servants and all the workmen or fixed wage earners who support their families on a salary. They must all diminish their expenditures in proportion to the new consumption..." There is some time for these market effects to occur, so the purchasing power decrease of workers is not seen for some time after the new money is printed. The initial spenders of the new money have purchasing power at the value the money had at the time the new money was created. This is the fed, the government, banks, and financial markets. By the time it trickles down the economy, price rises begin to occur and the bottom earners have reduced purchasing power. The idea of continuous money printing by the state, even during times of prosperity is Keynes's gift that keeps giving. The state and its elite benefit from increasing the money supply and low earners and savers pay the costs. The fed committing to printing trillions now is simply a way for them to enrich themselves with a convenient excuse which can deflect blame for any economic damage caused - the Coronavirus. This can be seen by comparing what is being printed, and what meagre percentage of it is actually going to the average American in their stimulus checks, versus what is going to banks, big business and others, paid for by future taxpayers. Daylight robbery, which will only further increase wealth inequality. [1]:https://mises.org/library/essay-economic-theory-0 https://mises.org/library/essay-economic-theory-0 (part 2, chapter 6)
thedudeabides5 6y ago
This is a decent answer. The other subtlety is that "money" as defined by you and I isn't just the money printed by the Fed, it also includes the liabilities of the banking system (primarily deposits, and in some cases financial paper etc). So there's public money (Fed), and private money (banks etc). Part of the reason the Fed can print so much public sector money in a recession without it being inflationary is at the same time, private sector money supply is contracting. When you see interest rates on corporate bonds, commercial paper, and the implicit rates of return on equities all spike, that's telling you that there's a (moderate) run on the private sector money system. The Great Depression was really a combination of a private sector money contraction, along with tight policy (a reduction in public sector money). The hope here is that we can balance those forces out, and specifically paper over the COVID hole with printed money. So far, deflation seems like the primary concern not inflation. Negative oil prices etc.. Will that be the case further out, will we turn into Japan in 1995 with zero rates forever, or Germany in 1920 and totally trash the currency, well, that's the billion dollar question.
pingec 6y ago
In other words the rich getting richer and the poor getting poorer (this time without starving). Sounds like a great mechanism for those who are wealthy.
- gsjoberg 6y ago
  People are absolutely starving. In my area, Team Rubicon and the National Guard, along with a coalition of non-profits, have mobilized to distribute thousands of meals per day to feed families who were hit by the triple-whammy of closed schools (many of which have food pantries on-site in low-income communities), newly-unemployed parents, and multi-month delays in unemployment payouts. The money that pays for all of this is a combo of state and federal disaster relief funds.
jcfrei 6y ago
> So when the wealthy* get money for their assets from the Fed, they aren't really buying the same things normal people are buying. So inflation so far has not crept into normal things. It has crept into wealthy* people things, a lot. They are not buying or rather spending more - that's the problem. The money stays within financial assets, rather than rich people buying a second and third yacht. If they did then more companies would build more yachts, creating additional jobs and eventually that wealth would trickle down. Now it just leads to higher asset prices.
- lazulicurio 6y ago
  > They are not buying or rather spending more - that's the problem I think that you might be missing the point of the GP. They're not saying that trickle down will invigorate the economy. They're saying that QE is bread and circuses for the wealthy. Asset inflation is precisely the point. This does has some negative secondary effects (the GP mentioned housing, education, and medicine), but as long as consumer goods stay cheap there's essentially no downside to inflating the cost of Veblen goods.
  - jcfrei 6y ago
    > Asset inflation is precisely the point. No it's not. The mandate of the FED is (among others) to maximize employment. The FED hopes to achieve this by stabilizing asset prices, therefore stabilizing pensions and housing prices, which creates consumer confidence and incentivizes spending. However as we can see there are diminishing returns - consumers are not nearly spending as much as the FED balance sheet would make you believe. The real problem I see with FED interventionism is that it lets fiscal policy off the hook. If you want to actually stimulate the economy you need a strong effort by the politicians, increase government debt and let the government massively invest in infrastructure, health, education or even create a universal basic income. However because deficits are already high, lots of politicians (and a sizeable part of the voters for that matter) are not willing to do that. Central banks around the world keep calling for more fiscal measures - but in reality politicians are mostly kicking the can down the road.
    - 6y ago

alexpetralia 6y ago

Yes, though this also affects many people who have retirement accounts and pensions. The difference is primarily between those who derive their income from capital (the financial economy) and those who derive it mostly from labor (the real economy).

sideshowb 6y ago
Yeah, this. Can't speak for the US but in the UK most of the middle class (at a guess around 50% of the population) has at least some* of their retirement savings in pension funds which rely on capital growth to fulfill their intended purpose. *most of the rest being in house prices to which the same applies in part.
DrAwdeOccarim 6y ago
I kind of agree, but again me ≠ economist. I've found value in looking at the median reitrement account value of Americans. I say median, because the wealthy* skew the mean and so it's not valuable. https://dqydj.com/retirement-savings-by-age-united-states/ https://dqydj.com/retirement-savings-by-age-united-states/ So this tells us the average person who is retired or approaching retirement, has about $40,000 of retirement savings. If that went down to $20,000 (50% drop in total market) would that change their normal person lifestyle a lot? I would say no, because CPI is pretty low and prices are pretty low for things normal people buy. It shows the inflation in asset prices seem to be detached from reality.

JackMorgan 6y ago

I suspect this is much more true than people have ever even considered before. The metaphor of "two economies" makes a whole lot of sense in a lot of ways.

bob33212 6y ago
The conversation about money between Frank and Charlie in this episode highlight the different ways the two groups think about the economy https://itsalwayssunny.fandom.com/wiki/Frank%27s_Back_in_Business https://itsalwayssunny.fandom.com/wiki/Frank%27s_Back_in_Bus...

sparkie 6y ago

The economies are not separate. The essence of what you described is what was laid out by Cantillon, in what is now known as the "Cantillon effect"[1] > "If the increase of hard money comes from gold and silver mines within the state, the owner of these mines, the entrepreneurs and smelters, refiners, and all the other workers will increase their expenses in proportion to their profits. Their households will consume more meat, wine, or beer than before. They will become accustomed to wearing better clothes, having finer linens, and having more ornate houses and other desirable goods. Consequently, they will give employment to several artisans who did not have that much work before and who, for the same reason, will increase their expenditures. All this increased expenditures on meat, wine, wool etc., necessarily reduces the share of the other inhabitants in the state who did not participate at first in the wealth of those mines in question. The bargaining process of the market, with the demand for meat, wine, wool etc., being stronger than usual, will not fail to raise the prices. These high prices will encourage farmers to employ more land to produce the following year, and these same farmers will profit from the increased prices and will increase their expenditure on their families like the others. Those who will suffer from these higher prices and increased consumption will be, first of all, property owners, during the term of their leases, and then domestic servants and all the workmen or fixed wage earners who support their families on a salary. They must all diminish their expenditures in proportion to the new consumption..." There is some time for these market effects to occur, so the purchasing power decrease of workers is not seen for some time after the new money is printed. The initial spenders of the new money have purchasing power at the value the money had at the time the new money was created. This is the fed, the government, banks, and financial markets. By the time it trickles down the economy, price rises begin to occur and the bottom earners have reduced purchasing power. The idea of continuous money printing by the state, even during times of prosperity is Keynes's gift that keeps giving. The state and its elite benefit from increasing the money supply and low earners and savers pay the costs. The fed committing to printing trillions now is simply a way for them to enrich themselves with a convenient excuse which can deflect blame for any economic damage caused - the Coronavirus. This can be seen by comparing what is being printed, and what meagre percentage of it is actually going to the average American in their stimulus checks, versus what is going to banks, big business and others, paid for by future taxpayers. Daylight robbery, which will only further increase wealth inequality. [1]:https://mises.org/library/essay-economic-theory-0 https://mises.org/library/essay-economic-theory-0 (part 2, chapter 6)

thedudeabides5 6y ago

This is a decent answer. The other subtlety is that "money" as defined by you and I isn't just the money printed by the Fed, it also includes the liabilities of the banking system (primarily deposits, and in some cases financial paper etc). So there's public money (Fed), and private money (banks etc). Part of the reason the Fed can print so much public sector money in a recession without it being inflationary is at the same time, private sector money supply is contracting. When you see interest rates on corporate bonds, commercial paper, and the implicit rates of return on equities all spike, that's telling you that there's a (moderate) run on the private sector money system. The Great Depression was really a combination of a private sector money contraction, along with tight policy (a reduction in public sector money). The hope here is that we can balance those forces out, and specifically paper over the COVID hole with printed money. So far, deflation seems like the primary concern not inflation. Negative oil prices etc.. Will that be the case further out, will we turn into Japan in 1995 with zero rates forever, or Germany in 1920 and totally trash the currency, well, that's the billion dollar question.

pingec 6y ago

In other words the rich getting richer and the poor getting poorer (this time without starving). Sounds like a great mechanism for those who are wealthy.

gsjoberg 6y ago
People are absolutely starving. In my area, Team Rubicon and the National Guard, along with a coalition of non-profits, have mobilized to distribute thousands of meals per day to feed families who were hit by the triple-whammy of closed schools (many of which have food pantries on-site in low-income communities), newly-unemployed parents, and multi-month delays in unemployment payouts. The money that pays for all of this is a combo of state and federal disaster relief funds.

jcfrei 6y ago

> So when the wealthy* get money for their assets from the Fed, they aren't really buying the same things normal people are buying. So inflation so far has not crept into normal things. It has crept into wealthy* people things, a lot. They are not buying or rather spending more - that's the problem. The money stays within financial assets, rather than rich people buying a second and third yacht. If they did then more companies would build more yachts, creating additional jobs and eventually that wealth would trickle down. Now it just leads to higher asset prices.

lazulicurio 6y ago
> They are not buying or rather spending more - that's the problem I think that you might be missing the point of the GP. They're not saying that trickle down will invigorate the economy. They're saying that QE is bread and circuses for the wealthy. Asset inflation is precisely the point. This does has some negative secondary effects (the GP mentioned housing, education, and medicine), but as long as consumer goods stay cheap there's essentially no downside to inflating the cost of Veblen goods.
- jcfrei 6y ago
  > Asset inflation is precisely the point. No it's not. The mandate of the FED is (among others) to maximize employment. The FED hopes to achieve this by stabilizing asset prices, therefore stabilizing pensions and housing prices, which creates consumer confidence and incentivizes spending. However as we can see there are diminishing returns - consumers are not nearly spending as much as the FED balance sheet would make you believe. The real problem I see with FED interventionism is that it lets fiscal policy off the hook. If you want to actually stimulate the economy you need a strong effort by the politicians, increase government debt and let the government massively invest in infrastructure, health, education or even create a universal basic income. However because deficits are already high, lots of politicians (and a sizeable part of the voters for that matter) are not willing to do that. Central banks around the world keep calling for more fiscal measures - but in reality politicians are mostly kicking the can down the road.
  - 6y ago