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Deflationary periods and natural recessions hurt in the short term, but they are also the most consistent periods in American history where wealth inequality de

Deflationary periods and natural recessions hurt in the short term, but they are also the most consistent periods in American history where wealth inequality decreases as the economy corrects and reallocates capital [0]. Staving them off at all costs for the last few decades via easy monetary policy is arguably one of the greatest contributors to the rise in wealth inequality, alongside poorly graduated income tax brackets and (to a lesser degree) automation. Charts: [0] https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/chart/#range:1989.3,2020.4 https://www.federalreserve.gov/releases/z1/dataviz/dfa/distr... https://fred.stlouisfed.org/series/WFRBST01134 https://fred.stlouisfed.org/series/WFRBST01134

dannyw 5y ago
Inflation reduces wealth inequality. inflation is good.
- azinman2 5y ago
  It also depletes savings of the poor. You can’t say inflation or deflation is universally good or bad. They have many effects.
  - pessimizer 5y ago
    The poor don't have savings, they have debts.
    - azinman2 5y ago
      Not always. My grandparents were poor, but lived within their small means. I remember them telling me how horrible it was to live through the 1970s inflation that decimated the small amount of savings that they had. But like I said about the no universally good or bad, inflation is good for effectively reducing debt.
  - variaga 5y ago
    Inflation helps debtors (because the real value of the nominal debt is reduced by inflation - debtors borrowed "high value" money and later, after inflation, can pay it off with "low value" money) and hurts creditors (same reason, just the effect is reversed). Rich people are (mostly) creditors. Poor people are (mostly) debtors. Inflation tends to hurt rich people (creditors) and help poor people (debtors). The people who run the economy are almost universally rich, and are (coincidentally, I'm sure /s) almost universally opposed to any increase in inflation. Side note: assets (real estate, gold, ...) are mostly inflation-neutral since their prices go up at the same rate as the prices of everything else. Where poor people do get hurt is when consumer prices go up and wages don't but that's not inflation - inflation is when the price of everything goes up, including labor i.e. wages.
    - azinman2 5y ago
      You can have debt (a car bill) and still have savings ($500 in the bank). That savings is often an emergency fund, and when the effectiveness of that fund is reduced, so is your ability to respond to an emergency. All of these things can be true simultaneously.
  - batty_alex 5y ago
    And really, it's all a balancing act. Inflation is good sometimes and bad at other times. It's... complicated, yo
  - nly 5y ago
    The poor have no savings
- lend000 5y ago
  Not sure if this is tongue in cheek, but no. Inflation relatively benefits those who have a higher percentage of their net worth in assets than cash (i.e. the rich). It also benefits those who have a lot of debt. Before the Fed got into the habit of keeping artificially low interest rates as a means to originate inflation (and fund Congress), this might have benefited the poor (at least those credit-worthy enough to take on meaningful debt). But now, the depreciation of debts in an inflationary environment also tends to disproportionally benefit the wealthy, who have easy access to cheap credit and frequently use it.
ineptech 5y ago
At a high level I agree, but monetary policy isn't the only way to affect wealth inequality either. And the question I'm wrestling with is not, "Was/is two decades of relatively easy money a bad policy?" but "Why hasn't the last year or two of very easy money caused huge problems?". And for bonus points, the follow-up question is: could we have done this anytime? Did the Covid economic downturn necessitate these drastic measures, or could we have adopted 2020 monetary policies in, say, 2018 or 2014 with the same results (skyrocketing stock market, skyrocketing inequality, but relatively stable inflation) and we never did it before because we never had a good excuse?
- lend000 5y ago
  > Why hasn't the last year or two of very easy money caused huge problems? See the other comment I posted on this article. Commodities have skyrocketed. But the price of the beef in your Big Mac was negotiated years ago, so consumer prices lag raw materials as multi-year supply chain contracts are updated. > could we have adopted 2020 monetary policies in, say, 2018 or 2014 with the same results (skyrocketing stock market, skyrocketing inequality, but relatively stable inflation) and we never did it before because we never had a good excuse? The economic shock of the pandemic no doubt slowed the velocity of money for a time, which further slowed the consumer inflationary effect. But that velocity has increased amongst lockdown fatigue and reopening in the US, while the money printed is still here. We're seeing it manifest in real estate, stocks, and commodities. "The everything bubble" is just a way of saying (wealth inequality x inflation).
- ItsMonkk 5y ago
  To answer that question we need to consider top down Vs bottom up. What Congress does is bottom up. After the stimulus went out, the amount of retail sales skyrocketed[0]. The first round single-handedly rebounded us back to where we were before CO-VID, and the second pushed us single-handedly up ~4 years worth of gains. This has a large effect on CPI inflation, but it's limited to when Congress can pass their bills. However with interest rates at basically nothing, they can afford to keep writing them forever if they don't care about the consequences. What the Fed does on the other hand when they lower the interest rate and buy bonds is top down. This money is funneled directly into the already wealthy. You see the more wealth inequality there is, the more goes to the wealthy, the less these top down has any effect on inflation. You're right, when you give money to the wealthy they save it, it's like pushing on a string, asset prices rise and this doesn't effect inflation, and they could have done it at any time. So you need to ask yourself, why now? The Fed is deeply concerned with what they are seeing with housing. You see the more wealth inequality there is, the more they need to make sure that their money stays in the monopoly money that is stocks, and out of the real economy. Once the wealthy work out that steel and lumber and housing have a better overall return than stocks, that's exactly when things that the CPI tracks finally takes off. Most of the time this is triggered by a supply shock. In the 1970s it was oil. If only 5% of the population can eat because of a famine, food is going to be priced such that only 5% can afford it. If the top 5% have billions, well, then food is priced in the billions. So what the Fed is seeing with housing is the wealthy are buying excessively. That's a big problem because that pushes housing demand to unsustainable levels which ultimately leaves people homeless. They don't like that. They want stocks to be the best. So they respond by making asset prices run higher, which gets the wealthy to reconsider and keep their money in the stock market. So the Fed actually hates inequality, but exacerbating inequality is the easiest way to do their job. [0]: https://fred.stlouisfed.org/series/MRTSSM44X72USS https://fred.stlouisfed.org/series/MRTSSM44X72USS

dannyw 5y ago

Inflation reduces wealth inequality. inflation is good.

azinman2 5y ago
It also depletes savings of the poor. You can’t say inflation or deflation is universally good or bad. They have many effects.
- pessimizer 5y ago
  The poor don't have savings, they have debts.
  - azinman2 5y ago
    Not always. My grandparents were poor, but lived within their small means. I remember them telling me how horrible it was to live through the 1970s inflation that decimated the small amount of savings that they had. But like I said about the no universally good or bad, inflation is good for effectively reducing debt.
- variaga 5y ago
  Inflation helps debtors (because the real value of the nominal debt is reduced by inflation - debtors borrowed "high value" money and later, after inflation, can pay it off with "low value" money) and hurts creditors (same reason, just the effect is reversed). Rich people are (mostly) creditors. Poor people are (mostly) debtors. Inflation tends to hurt rich people (creditors) and help poor people (debtors). The people who run the economy are almost universally rich, and are (coincidentally, I'm sure /s) almost universally opposed to any increase in inflation. Side note: assets (real estate, gold, ...) are mostly inflation-neutral since their prices go up at the same rate as the prices of everything else. Where poor people do get hurt is when consumer prices go up and wages don't but that's not inflation - inflation is when the price of everything goes up, including labor i.e. wages.
  - azinman2 5y ago
    You can have debt (a car bill) and still have savings ($500 in the bank). That savings is often an emergency fund, and when the effectiveness of that fund is reduced, so is your ability to respond to an emergency. All of these things can be true simultaneously.
- batty_alex 5y ago
  And really, it's all a balancing act. Inflation is good sometimes and bad at other times. It's... complicated, yo
- nly 5y ago
  The poor have no savings
lend000 5y ago
Not sure if this is tongue in cheek, but no. Inflation relatively benefits those who have a higher percentage of their net worth in assets than cash (i.e. the rich). It also benefits those who have a lot of debt. Before the Fed got into the habit of keeping artificially low interest rates as a means to originate inflation (and fund Congress), this might have benefited the poor (at least those credit-worthy enough to take on meaningful debt). But now, the depreciation of debts in an inflationary environment also tends to disproportionally benefit the wealthy, who have easy access to cheap credit and frequently use it.

ineptech 5y ago

At a high level I agree, but monetary policy isn't the only way to affect wealth inequality either. And the question I'm wrestling with is not, "Was/is two decades of relatively easy money a bad policy?" but "Why hasn't the last year or two of very easy money caused huge problems?". And for bonus points, the follow-up question is: could we have done this anytime? Did the Covid economic downturn necessitate these drastic measures, or could we have adopted 2020 monetary policies in, say, 2018 or 2014 with the same results (skyrocketing stock market, skyrocketing inequality, but relatively stable inflation) and we never did it before because we never had a good excuse?

lend000 5y ago
> Why hasn't the last year or two of very easy money caused huge problems? See the other comment I posted on this article. Commodities have skyrocketed. But the price of the beef in your Big Mac was negotiated years ago, so consumer prices lag raw materials as multi-year supply chain contracts are updated. > could we have adopted 2020 monetary policies in, say, 2018 or 2014 with the same results (skyrocketing stock market, skyrocketing inequality, but relatively stable inflation) and we never did it before because we never had a good excuse? The economic shock of the pandemic no doubt slowed the velocity of money for a time, which further slowed the consumer inflationary effect. But that velocity has increased amongst lockdown fatigue and reopening in the US, while the money printed is still here. We're seeing it manifest in real estate, stocks, and commodities. "The everything bubble" is just a way of saying (wealth inequality x inflation).
ItsMonkk 5y ago
To answer that question we need to consider top down Vs bottom up. What Congress does is bottom up. After the stimulus went out, the amount of retail sales skyrocketed[0]. The first round single-handedly rebounded us back to where we were before CO-VID, and the second pushed us single-handedly up ~4 years worth of gains. This has a large effect on CPI inflation, but it's limited to when Congress can pass their bills. However with interest rates at basically nothing, they can afford to keep writing them forever if they don't care about the consequences. What the Fed does on the other hand when they lower the interest rate and buy bonds is top down. This money is funneled directly into the already wealthy. You see the more wealth inequality there is, the more goes to the wealthy, the less these top down has any effect on inflation. You're right, when you give money to the wealthy they save it, it's like pushing on a string, asset prices rise and this doesn't effect inflation, and they could have done it at any time. So you need to ask yourself, why now? The Fed is deeply concerned with what they are seeing with housing. You see the more wealth inequality there is, the more they need to make sure that their money stays in the monopoly money that is stocks, and out of the real economy. Once the wealthy work out that steel and lumber and housing have a better overall return than stocks, that's exactly when things that the CPI tracks finally takes off. Most of the time this is triggered by a supply shock. In the 1970s it was oil. If only 5% of the population can eat because of a famine, food is going to be priced such that only 5% can afford it. If the top 5% have billions, well, then food is priced in the billions. So what the Fed is seeing with housing is the wealthy are buying excessively. That's a big problem because that pushes housing demand to unsustainable levels which ultimately leaves people homeless. They don't like that. They want stocks to be the best. So they respond by making asset prices run higher, which gets the wealthy to reconsider and keep their money in the stock market. So the Fed actually hates inequality, but exacerbating inequality is the easiest way to do their job. [0]: https://fred.stlouisfed.org/series/MRTSSM44X72USS https://fred.stlouisfed.org/series/MRTSSM44X72USS