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The root cause is increased wealth inequality. "Capital" is assets that are invested by their owner instead of just immediately consumed. So, the amount of ca

by s17n 6y ago

The root cause is increased wealth inequality. "Capital" is assets that are invested by their owner instead of just immediately consumed. So, the amount of capital that exists is variable, depending on the preference of asset owners, which is a function of the rates of return they can expect, as well as the utility of consumption. So its backwards to to say "rates of return go down because there's too much capital" - what's really happening is that a lot of assets are held by people who are so rich that the marginal utility of additional consumption to them is essentially zero, which in turn means that they are willing to invest their assets until the rate of return is also close to zero.

nly 6y ago
Interesting concept. Do you have any links to research or theories about this way of looking at it?
- s17n 6y ago
  Nah, just made it up, it's probably total crap
  - danans 6y ago
    Even if you made it up, your comment is basically describing the diminishing marginal utility of wealth. https://www.economicshelp.org/blog/12309/concepts/diminishing-marginal-utility-of-income-and-wealth/#:~:text=Diminishing%20marginal%20utility%20of%20income%20and%20wealth%20suggests%20that%20as,may%20not%20make%20you%20happy%E2%80%9D https://www.economicshelp.org/blog/12309/concepts/diminishin... https://www.investopedia.com/ask/answers/072815/what-marginal-utility-income.asp https://www.investopedia.com/ask/answers/072815/what-margina... The net effect is that consumption (and associated demand) is suppressed at the lower to middle end of the income scale, where individuals' income isn't enough to sustain their needs + wants. When these individuals spend, the demand for labor + raw materials per $ spent is high, because they are often buying consumables or durables (food, washing machines, etc). At the high end of the income/wealth distribution, there are few needs that aren't met or exceeded, so their wealth ends up chasing assets and investments that induce far less demand for labor per $ invested. A the extreme end of this are private equity funds (billions managed by a small number of people).
  - imtringued 6y ago
    The primary mistake is that the return on capital is going up. Fed is pumping money which is mostly arriving in stocks and other assets. Rich people are betting on that money and thus although the PE ratio of the asset itself is going down the returns from capital gains keep going up fast enough to counteract the loss in yield.
chii 6y ago
> they are willing to invest their assets until the rate of return is also close to zero. which is how new jobs are created - from this mechanism of investment (and acceptable returns from it). The problem is whether these jobs produce value in the future, at a greater rate than the returns being expected by the owners. If the excess returns are all captured by the owners, society wouldn't have progressed forward. But if these jobs brought more value than just the ROI, then it's a good outcome.
AngrySkillzz 6y ago
The root cause is demographics. People have a standard life cycle - you save when you are young, peak saving around a decade before retirement, and then spend savings in retirement. What is different now is that China has a massive boom in working-age population, and they are rapidly becoming more affluent, and the have a savings rate that is like 10x of the average American. I wouldn't say they are "so rich," just that savings rates have a cultural component. So anyway, you have this massive influx of savings flowing into the system, buying up investable assets to save for retirement, and thus bidding up prices. They call this the "global savings glut." There are OLG (overlapping generation) models that show how this behavior works in a simplified setting; you can easily get over-saving, dynamic inefficiency, and "rational bubbles" as an outcome in an OLG model with different demographic curves.
- imtringued 6y ago
  An aging economy would experience inflation since there aren't enough young people to take care of the old people. In practice old people keep working because they can't retire.
- s17n 6y ago
  I don't need to do any research to tell you that the total wealth of the Chinese middle class is a lot less than the total wealth of the top 1% of Americans.

by s17n 6y ago

nly 6y ago

Interesting concept. Do you have any links to research or theories about this way of looking at it?

s17n 6y ago
Nah, just made it up, it's probably total crap
- danans 6y ago
  Even if you made it up, your comment is basically describing the diminishing marginal utility of wealth. https://www.economicshelp.org/blog/12309/concepts/diminishing-marginal-utility-of-income-and-wealth/#:~:text=Diminishing%20marginal%20utility%20of%20income%20and%20wealth%20suggests%20that%20as,may%20not%20make%20you%20happy%E2%80%9D https://www.economicshelp.org/blog/12309/concepts/diminishin... https://www.investopedia.com/ask/answers/072815/what-marginal-utility-income.asp https://www.investopedia.com/ask/answers/072815/what-margina... The net effect is that consumption (and associated demand) is suppressed at the lower to middle end of the income scale, where individuals' income isn't enough to sustain their needs + wants. When these individuals spend, the demand for labor + raw materials per $ spent is high, because they are often buying consumables or durables (food, washing machines, etc). At the high end of the income/wealth distribution, there are few needs that aren't met or exceeded, so their wealth ends up chasing assets and investments that induce far less demand for labor per $ invested. A the extreme end of this are private equity funds (billions managed by a small number of people).
- imtringued 6y ago
  The primary mistake is that the return on capital is going up. Fed is pumping money which is mostly arriving in stocks and other assets. Rich people are betting on that money and thus although the PE ratio of the asset itself is going down the returns from capital gains keep going up fast enough to counteract the loss in yield.

chii 6y ago

> they are willing to invest their assets until the rate of return is also close to zero. which is how new jobs are created - from this mechanism of investment (and acceptable returns from it). The problem is whether these jobs produce value in the future, at a greater rate than the returns being expected by the owners. If the excess returns are all captured by the owners, society wouldn't have progressed forward. But if these jobs brought more value than just the ROI, then it's a good outcome.

AngrySkillzz 6y ago

The root cause is demographics. People have a standard life cycle - you save when you are young, peak saving around a decade before retirement, and then spend savings in retirement. What is different now is that China has a massive boom in working-age population, and they are rapidly becoming more affluent, and the have a savings rate that is like 10x of the average American. I wouldn't say they are "so rich," just that savings rates have a cultural component. So anyway, you have this massive influx of savings flowing into the system, buying up investable assets to save for retirement, and thus bidding up prices. They call this the "global savings glut." There are OLG (overlapping generation) models that show how this behavior works in a simplified setting; you can easily get over-saving, dynamic inefficiency, and "rational bubbles" as an outcome in an OLG model with different demographic curves.

imtringued 6y ago
An aging economy would experience inflation since there aren't enough young people to take care of the old people. In practice old people keep working because they can't retire.
s17n 6y ago
I don't need to do any research to tell you that the total wealth of the Chinese middle class is a lot less than the total wealth of the top 1% of Americans.