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Research suggests that when the rich bank, the rest borrow

171 points by gamechangr 5y ago

paulpauper 5y ago
As US income inequality began a marked increase in the 1980s, the richest 1 percent of households increased their savings while the bottom 90 percent fell into debt. Research finds that lenders indirectly used the top 1 percent’s savings to finance this borrowing, essentially enabling the rich to benefit from the bottom 90 percent’s debt repayments. This does not imply causality as the author mistakenly assumes. Maybe the bottom 90% have more debt simply because costs are rising faster than wages and ability to save. Maybe the rich can save more because thy earn more.
- deadwing0 5y ago
  This. I struggle to see how higher savings by the wealthy can cause me to take on any more debt. Is the argument the wealthy use cash to invest in assets (houses), thus driving up the price and causing middle and lower class people to be forced to borrow more to buy a house?
  - kiba 5y ago
    But people do want to own homes, but the problems is debt and the fact that homes are seen as a way to accumulate wealth. Affordable housing clashes with that. Also, the article seem to treats building a new road as an unalloyed good.
    - mason55 5y ago
      > homes are seen as a way to accumulate wealth It's worth having a discussion about whether this makes sense and is something to strive for. Unfortunately, because society has been based on this for so long, the people who spent their lives paying off a 30 year mortgage would never agree to make any changes that would reduce the value of their house. You'd need to come up with a plan to transition away from a house-based model of wealth over a long enough period of time where current home owners don't get screwed but people know what it means to buy a house now. And I don't think any plan that's long-term enough to be sensible could actually survive politics long enough to be successfully implemented.
  - js8 5y ago
    Do you think advertisement works? It is certainly possible, using advertising, to convince many people that NOW is the special time when taking on debt is actually OK, because rising house prices lift all boats. (Not really that different from any other gold rush..) Which is what happened before 2008, when there was very little oversight in borrowing (e.g. NINJA loans). We know empirically that if the lenders are not obligated to make sure that the loans can be repayed, predatory lending will occur and cause social problems.
  - dastbe 5y ago
    Savings is probably confusing here, because savings change based on your socioeconomic position. People go from not saving anything, to saving cash, to saving in assets. Some of these assets have a poorer counterparty who is getting access to that money in return for repayment + interest. Perversely, the more money is available in these assets, the lower the interest rate and so the more money these counterparties can borrow. This drives up the cost of physical assets being bought with this money, like homes, because the value of the home is dictated by the debt load a buyer can bear. Lower interest rates means you can support more debt, which means someone will take on more debt and outcompete you for that house.
  - fancifalmanima 5y ago
    I'm definitely speculating, but I could see banks having a glut of money to loan contributing to the low interest rates that have existed for a while now (thinking of money from a supply/demand perspective). With those lower interest rates leading to more interest in buying homes and pushing up prices (during the subprime crisis, to folks that couldn't necessarily afford it). While you'd also expect a housing construction boom, its certainly plausible that the industry would have to play catch up to demand. (It seems easier to me to hire a realtor to go look at homes than to start or expand a construction business). Zoning/other regulations can also slow down that process. The low interest rates also make larger/more expensive homes more feasible for buyers, due to the fact that a smaller percentage of the monthly payment is interest. I could certainly see ways that the above would lead to an individual having a higher debt load than they otherwise would.
  - metrix 5y ago
    They are not forcing you, it's that the 1% have savings and want that savings to make money so it's invested. Portions of that investment go into banks who loan out money to the middle class. The middle class uses this money to buy cars/houses which helps the 1% to increasing their savings, which they then invest a portion of into banks... BUT like another comment discussed, a lot of this is going over seas. Right now this cycle is pushing US asset values higher, but at some point this will come crashing down, and the money that was invested in under inflated markets will be valued correctly/over valued. At which point that money will flow back into the US.
  - uuidgen 5y ago
    Banks, having surplus cash, offer low-monthly-payment loans which allows more people to buy them, by the way earning 0.6-0.8 * X to the banks. Since there is a lot of cheap credit price stops constraining the demand side. You can get almost arbitrary large loan with arbitrary long timespan. This causes prices to rise. Houses seem like good investment so wealthy buy them restricting supply side, causing prices to rise even higher. Rising prices make it impossible for most to save for the house. They have to take loans. Now poor people who want house need to pay the inflated price + credit fees on top of that. Sellers see their assets rise in value, creditors see more customers and more revenue. If there was no cheap credit then the prices wouldn't rise so much because nobody would be buying them. Now, I don't know how true is all above but that seems to be the explanation of the issue I've seen many times.
  - imtringued 5y ago
    No, nobody is buying your products. Nobody wants to hire you. Nobody is investing in a company that will hire you. If you have no income you must go into debt. It's that simple.
- jmholla 5y ago
  > This does not imply causality as the author mistakenly assumes. Maybe the bottom 10% have more debt simply because costs are rising faster than wages and ability to save. Maybe the rich can save more because thy earn more. You can't choose one sentence and refute the whole article based on it. It's a part of a whole. The point of the article is to make that causal link.
  - rsj_hn 5y ago
    The one sentence is representative of a lack of causal arguments and the use of whimsical speculation to replace providing evidence for said casual arguments. I could argue that liberalization of global capital flows allowed significant foreign investment leading to an abnormally low interest rate regime, which is why everyone (rich and poor) has taken on more debt, and I guarantee you that the rich take on far more debt than the poor. But as the poor tend to have mostly human capital on their balance sheet while the rich have assets, it creates an appearance that the poor have net debt (which they do not) while the rich have net assets (which they do). In fact both the poor and rich are solvent -- have more assets than debt, but the assets of the poor are future wage earnings. Thus in any reduction of interest rates, the poor will disproportionately benefit over the rich and will take advantage of this to increase borrowing. E.g. if you are rich then both your assets and your liabilities will grow in lockstep (at the macro level). But if you are poor, then your assets are your wages which do not grow in lockstep with interest rates. Thus a reduction of interest rates disproportionately helps the poor to borrow more but an increase disproportionately hurts their ability to borrow. These are just some of the interesting effects when you seriously look at debt-dynamics and interest regimes. But in no regime can you make a case that the mere existence of the rich somehow causes the poor to borrow. Yet the reason for low interest rates and the fact that such low rates are responsible for both the behavior of the rich and poor are not covered in this piece. In fact it used to be the case that Rebecca's predecessors would bemoan the fact of how the poor were locked out of credit markets and thus unable to participate in the wealth-creating business of taking on debt to purchase long-lived assets, and thus they had to rent an apartment instead of being able to buy a house, or could not borrow to get a more reliable car on credit, etc. Now that those barriers have been substantially reduced, there is lots of hand-wringing about how the poor are taking on debt. This amnesia is funny to those of us who have been following this debate from times when rates were much higher and the poor borrowed very little. Then the complaint was "why are the rich locking the poor out of credit markets?" Resentment can be stoked in any situation. It is particularly hilarious because Keynes advocated for lowering interest rates in order to "euthanize the rentier" and he blamed the rentier class for keeping rates higher than they should have been. E.g. he blamed the rich for high interest rates. Now the argument is that rich are to blame for low interest rates. Keynes would be rolling over in his grave. But the persistent theme seems to be that the rich are to be blamed. In fact there is nothing wrong with taking on debt. What matters is your ability to service the debt, and in a low interest rate regime, that service capacity is substantially increased, and thus so are debt levels. Perhaps this is not worth the trade off of increased financial fragility. Or perhaps it is -- data must be required and real arguments made. But merely the existence of the debt levels themselves -- again held both by poor and rich -- are not something to be avoided. This blog post doesn't attempt to engage with any of this literature or provide any fact-based arguments about casual mechanisms or whether something is beneficial or harmful. It's just more hand-wringing, which is a shame as debt-dynamics, interest rate regimes, global investment flows and credit constraints are important topics that deserve to be treated seriously rather than as a political football in the resentment olympics.
- pmoriarty 5y ago
  "Maybe the rich can save more because thy earn more." That's certainly a big part of it, but far from the only one. When you're living paycheck to paycheck you have no money to invest, so the poor are usually limited to earning only as much as their poorly paying jobs will pay them, while the salaries of the rich usually only make up a small to non-existent portion of their wealth. On top of that, at least in the US, capital gains are taxed at a much lower rate than income, so those whose income makes up a large fraction of what they earn are doubly screwed. For the really poor, food expenses are a significant portion of their expenses, and yet many of them live in food deserts where food is not only less nutritious and less varied than what the rich have access to, but that food is often more expensive. If as a poor person you have to take out a payday loan to get by, you're also going to be paying through the nose for that. Predatory lending practices are also widely employed against the poor. If you can't afford your own home (or to own a home but never pay it off), you could wind up paying way more in rent or mortgage payments than if you had bought a home outright in cash and never had to pay any interest on it at all. That's not to mention medical expenses, which often bankrupt people in America... or legal expenses, which the poor often can't afford and wind up going to jail because of. Finally, its the wealthy and powerful who write the laws and and use their connections in and various forms of bribes of government to favor mostly themselves, their friends and families. The poor do not have this sort of pull, and are often led by the nose by the rich to vote against their own interests.
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- majormajor 5y ago
  > This does not imply causality as the author mistakenly assumes. Maybe the bottom 90% have more debt simply because costs are rising faster than wages and ability to save. Maybe the rich can save more because thy earn more. If it's easier to borrow money, costs will go up. Look at college education over the past half century, or housing vs interest rates. So if some people start taking on more debt than they should because it's easier, a lot of other people are pushed into it even if they wouldn't have originally when they're priced out by the borrowers.
- imtringued 5y ago
  >Maybe the bottom 90% have more debt simply because costs are rising faster than wages and ability to save. You just rephrased the article. What you are saying is identical to what the article said. If companies don't borrow money from the wealthy and don't spend their money on hiring people or higher wages then then there are unemployed people who must (emphasis on must) consume (think of food and rent) in excess of their income because their income is 0 and the only way they can keep consuming is by going into debt. Therefore what you and the article said is the same thing.
pmoriarty 5y ago
"Ideally, all those savings would be channeled into productive investments such as research and development, or practical equipment, or new roads, or even new yachts--investments that would promote growth in the economy." It's important to keep in mind that even when that money is spent, there's no guarantee it'll be spent domestically. Just as an example, Jeff Bezos bought his $500 million superyacht from Oceanco, a Dutch yachtmaker. Increasingly, the ultra-rich are, like many of the companies they control, multinational.
- kaesar14 5y ago
  As vile as the robber barons were, at least they were bounded by the confines of their environment to care at least a bit about their countrymen and have some patriotic tendencies.
  - MomoXenosaga 5y ago
    Do we count Africans or the native American tribes?. We have made some progress.
    - cyberlurker 5y ago
      Modern day robber barons aren’t helping those groups either.
      - tootie 5y ago
        I think compared to the Gilded Age they're doing a 1000x better job. Even if it's because they were dragged into doing it. It's easy to point out shortcomings, but don't ignore progress. Think of America as a giant venture-funded experiment in equality. Even if we're 200 years in without a showing a profit, we've had steady revenue growth and loyal customers. Profits will come eventually.
        kaesar14 5y ago
        How are they doing a better job?
jl2718 5y ago
No. It’s housing prices pumped by federal loan guarantees.
- pedro_hab 5y ago
  Yeah, the government also artificially suppresses interest rates, making it easier to get mortgages yet somehow the blame goes to the lenders.
  - yunohn 5y ago
    > somehow the blame goes to the lenders I find this statement quite tone-deaf. It’s hard to blame people for wanting a roof over their heads.
    - anchpop 5y ago
      Maybe you’re thinking of borrowers? Lenders are the ones who give the loans and make money from interest.
    - imtringued 5y ago
      It's the neoliberal mindset and everyone is falling for it. Pretty much every party in Germany is neoliberal. The irony is that a lot of neoliberal thinking is self defeating. Honestly, after I learned about neoliberalism I came to peace with the world because I know everyone deserves their suffering and there is no injustice. All those republican voters are voting for their own doom. It's fantastic. I no longer need to feel bad about their suffering because there is no contradiction, no conspiracy theory, no trick, no evil cartoon villain behind the scenes.
      - pedro_hab 5y ago
        Can you give an example of a country that archived economic prosperity using leftist policies? I also find your comment on republicans quite wrong, since I don't see many differences between republicans vs democrats. Both have been running ever increasing deficits, each president tops all previous presidents combined. You can't really say any of the US policies have liberal.
vinhboy 5y ago
> Say a corporation issues equity to the wealthy, but instead of spending the proceeds on research or equipment, puts that money into a time deposit at a bank, which in turn uses it to fund a mortgage for a less-affluent household. Am I understanding this correctly? They are saying that because corporations are saving more, the savings become money that can be loaned to people, and because there is more money to loan, the price of everything goes up, therefore hurting the poor unintentionally? That's pretty interesting.
- quadrangle 5y ago
  Whether they mean it or not, it's sensible. Mortgage amounts correlate to home prices. Consider the most basic idea that if mortgages did not exist, there would be far fewer people who could pay a premium price for a house, and thus the housing market would be forced to cater to the much lower prices and less expensive housing that people could afford without mortgages. I mean, except there's some point where the reality is just untenable, people need to be able to borrow. But the easier it is to borrow, the easier it is for more people to buy more expensive houses and bid up the prices.
  - xeromal 5y ago
    ala 2008 jumbo loans
  - majormajor 5y ago
    Even more direct is the link between interest rates and house prices. Lower rates push up prices for everyone, you don't get the choice of borrowing X at a better rate to save money every month instead of borrowing X+Y with the same payment if someone else is out there willing to pay X+Y. It's an interesting dynamic of the more reckless moving the market for everyone and harming not just themselves, but also others, and the potential link to more money being available for lending due to inequality is very interesting indeed, because it suggests a nasty negative cycle.
    - mumblemumble 5y ago
nverno 5y ago
They are saying rich people are indirectly financing poor peoples' debt by owning stocks and bonds because corporations are then stockpiling cash. Not very convincing as a causal reason the middle class got buried in debt. Just taking advantage of the rich v. poor narrative
- pauldickwin 5y ago
  To these journalists that have little understanding of economics, it's always a zero-sum game. They make up their own economics.
  - quadrangle 5y ago
    debt and credit are zero-sum. The part that isn't necessarily zero-sum is productivity. So, debt/credit patterns can lead to productivity, depending on the details. But I think the real point here is that when investments are dependent on others' debt and not on other types of returns, there's a whole system that is built on promoting debt, selling people on accepting debt…
    - sudosysgen 5y ago
      Indeed, generally almost everything in economics is at best zero sum outside of productivity.
    - imtringued 5y ago
      That's the reason the US government is running deficits. It's because it is rescuing consumers from the burden of taking on that debt.
    - b9a2cab5 5y ago
      In nominal terms, they are zero-sum. If you consider inflation then debtors have the advantage since we live in an inflationary economy, so wages will keep pace with general inflation but the debt amount remains constant. Debt is an essential part to accelerating growth if used for productive investments (say, a degree in computer science). What the "middle class" (really the working poor but people call it the middle class) are using debt for is not productive; when we have layaway and things like Affirm financing, etc. we have lots of debt being used to purchase luxury goods and services. You can argue the "system" is to blame for people buying electronics on layaway or you can blame the people for being irresponsible. To whoever is going to respond by saying poor people buy food on credit cards: you can't use layaway and Affirm like services for food.
gimmeThaBeet 5y ago
I'm a bit confused reading this, the argument that the 1%+ echelon are ~= to corporations in an aggregate model, and that effectively corporations are underinvesting? Or rather that the 1% are under-consuming, and so any evaluations of net household saving/consumption are skewed because there is dramatically more saving on one side and more aggregate debt on the other. I haven't seen what recent levels of corp/household/gov/balance spending/saving are. I also like to refer to this post for these kind of macro questions. I'm not an economist, but it's interesting to see how all the pieces fit together. https://nathantankus.substack.com/p/where-do-profits-come-from https://nathantankus.substack.com/p/where-do-profits-come-fr...
mentos 5y ago
Wouldn’t the effect of hoarding wealth be anti inflationary? If it’s not being spent then it might as well not exist in which case it’s as if all of the money was confiscated and deleted by the government anyways?
- Sevii 5y ago
  It isn't being hoarded, it is being lent out.
- lurquer 5y ago
  Literally hoarding... as in under your mattress? Yes. Instead, your ‘hoarders’ are loaning their money to a bank which then in turns loans many multiples of that money to borrowers.
- imtringued 5y ago
  Hoarding Bitcoin is deflationary. "Hoarding" USD in a bank account can be deflationary if there is not enough demand for loans or if the borrowed money never reaches the real economy.
- pydry 5y ago
  >Wouldn’t the effect of hoarding wealth be anti inflationary? Only if it's being hoarded as cash - something almost nobody does. If it's being hoarded in the form of assets, you'll see rampant asset inflation instead.
PaulDavisThe1st 5y ago
Is it just me, or is Chicago Booth beginning to publish more pop-econ articles that question the simplistic reality of the so-called "Chicago School of Economics" ?
vmception 5y ago
> “People get angry about seeing the rich consuming a lot,” Sufi says, “but that’s better than what they’re actually doing.” I’m going to use that line
- wvenable 5y ago
  Money needs to move to benefit the economy. In my opinion, one of the big problems with the super-rich is they have more money than they can ever spend (over several lifetimes). This money is just siphoned out of the economy. We're taking natural resources and work and converting it into a number in a computer and that's it. There is such a glut of money doing nothing that there is hardly any place to even invest it. You even have companies, like Apple, sitting on massive cash piles. A pandemic can't affect the stock market or housing because all this money needs somewhere to be.
  - vmception 5y ago
    The central banks think they can make the money move if they buy everything reputable and force everyone else to consider buying less reputable things. This is somewhat happening but not in great enough numbers, one of the desired examples being SPACs buying startups where VC's and the whole population continue underservicing, the less desired examples being "meme" stocks but it is good when those companies recapitalize with direct issuances, unexpected examples being intangibles and obscure cryptos and I'm not offering an opinion about that, I do know it is not the point of the central banks monetary policy. They want people to be forced to invest in founders without pedigrees. Simple. As we can see, people would rather pay the government to not risk their own money like that, inflation concerns be damned. The hoarded money will really move if the central banks A) stopped buying and B) sold everything What Congress can do: keep wage workers on basic during recessionary periods and don't let the Fed buy bonds and mortgaged backed securities So everything tanks to its natural market price while employers convulse and stop hiring, and more capital efficient organizations replace them, and the unemployment numbers can be ignored because they're fine for now
papito 5y ago
There is another angle. https://awealthofcommonsense.com/2021/05/did-hgtv-ruin-the-housing-market-for-millennials/ https://awealthofcommonsense.com/2021/05/did-hgtv-ruin-the-h... What if young people burry themselves in debt because they want the instagram life now? What if they refuse to live according to their means?
- iso1631 5y ago
  Vast majority of debt in the US is Tuition, Housing and Medical Complaining about avocado toast won't change that
  - papito 5y ago
    Medical is one thing - housing and tuition is completely self-imposed. I make 6 figures in software but I went to New York City College. I graduated with zero debt (in fact, I got paid to study). And I am still renting at 40. Getting an Instagram home takes time and saving for decades. It's always been this way.
    - 1-6 5y ago
      This. I think too many people can think to a friend who purchased their McMansion at 30 and think to themselves that buying a home is unattainable. I realized that it takes constant self-reflection and discipline to build a 20-50% down payment on a 15-year mortgage WHILE socking money away for retirement, 529, and HSA. Granted, rates are lower than they ever have been historically but borrowing to get rich is still leveraging. I get ticked off when talking to real estate agents who only think leveraging is the way. To be honest, I don't have a credit score any longer. It's called manual underwriting!
  - nostromo 5y ago
    The article linked is about housing -- specifically younger people buying more house than they can afford. I'm sure a similar argument could be made about education. I personally know a number of people up to their ears in debt for advanced degrees that have no economic value.
beefield 5y ago
And this, in my humble opinion, is the reason why there has been a long term decreasing trend in interest rates for the last 40 years. And it will not reverse before the trend of wealth distribution getting more and more inequal reverses. So get used to the idea of increasing pressure to get functional negative interest rates.
hamilyon2 5y ago
Please explain this one more time to me. I thought banks were literally creating money when handing out credit. Banks are prohibited to loan money on their saving accounts, so amount of credit issued is not directly influenced by amount of money saved. It is rather influenced by regulation on those things.
jfrunyon 5y ago
> After all, a yacht is rooted in the real economy. A good chunk of the money originally spent on the yacht went to pay workers and buy equipment Sure. And then the rest of it went to profit. Knowing the yacht is 454 ft (what's the sqft on that? four digits?), costs $590m, and yet a tricked-out 66,000 sqft megamansion-ranch-thing is worth less than a quarter of that [https://www.latimes.com/business/story/2021-05-04/bill-gates-homes-melinda-gates-net-worth-who-gets-66000-square-foot-mansion https://www.latimes.com/business/story/2021-05-04/bill-gates...], I'm gonna take a guess that there's a loooooot of profit in that yacht. Which means that it's just 1%ers passing money around amongst themselves. (Yes, I'm comparing apples and oranges here a bit, but I really have to question how much of that is going to materials and labor...)
- bugzz 5y ago
  I'd say the real "problem" with spending on yachts and other luxuries is that it takes real value to make - skilled labourers and valuable materials going to something that doesn't provide that much human happiness. Not saying the ultra rich shouldn't be allowed to spend their money how they want, just that it does seem to have consequences to me.
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orlovs 5y ago
Oh well, yet another publication “rich bad, poor good”. I will leave out payday lending, buying small goods on credit etc. Lets talk about mortgages and student loan. Let’s face it, if you are rich you have become rich somehow or stayed rich ( even harder than first one) you probably understand risk management. What we have got here: you are lending your capital to folks who are less rich (much less trustworthy). Why you are lending to them if risk relatively is pretty high? Actually, its not student loans in most of civilized society is backed by government programs, mortgages is backed by GSEs. You can land money with relatively no risk at all. I am oversimplify but, many problems comes from politician will “help little people/protect little people” or called aswell “to get elected or reelected”. Our friends in government puts incentives to lend money to consumption without almost risk. And I am from Europe/Baltics. We have got our own “helpful programmes”. Like government agency lends you downpayment for mortgage with pretty barbaric rate. So what happened, default downpayment have gone up from 10% to 15-20% to get skin in the game from lender. Who suffers the most? Those who have got these 10% for downpayment.
quantified 5y ago
Can this be seen as simply hoarding money?
didibus 5y ago
I think this is a very important thing to study some more. The entire system is built on the assumption that money goes round, never sits idle, and is always used to productive use in terms of growing production. If it's true that there are issues at that level, we really need to better understand them and address them. If we make things very simplistic. If I'm the only one that has a spear and I hunt a deer with it. I cannot eat it all. I'll have the best parts and a good chunk of it to satiety. Now I'm left with a lot more deer leftovers. If I just froze it and never went hunting again for the next 4 weeks, by just eating more of that frozen deer. Keeping in mind I'm the only one with a spear. That be very bad economically, what are the others to hunt with? What are they all to eat? Now, the morgage loans are like if someone comes and say, could I have some of your frozen deer to eat? And I were to say, yes you can have a little bit, but in repayment you owe me a full deer which you must give me in the next year (which others will need to hunt by hand, since they don't have a spear). Over time, what happens is all hunted deers by everyone goes to me, as everyone owes me a deer. And I now own all hunted deers, trading more of its meat for more repayment of more deers. The issue with this is that there's always a surplus of deer, and yet everyone is in dept and only eating a fraction. In effect, deer production is wasted. Another issue with this, is that it did not contribute to boost production of deers or anything else. A better scenario is that I don't freeze my leftover deer. Instead I trade it to others for other things. If I did this, I create a market for other goods, and I boost the production of more things. Like maybe I trade it to people and I ask in exchange for it to have a second spear built. This allows spear manufacturing to grow, and also it gives me two spears that I can now use to hunt more deer with. Having commissioned this, I also enabled someone else to learn how to make spears, which they can now make for themselves or others. You could assume prior to that they simply didn't have the time to explore making spears, because they constantly needed to hunt for food by hand just to survive. So this explained three scenarios: 1. Money is horded idle, where I just freeze the deer for myself and live off of it for the next 4 weeks until I hunt again. 2. Money is invested in unproductive ways, creating a dept cycle of the poor while boosting my own wealth. Where I loan parts of my frozen deer in exchange for a future full deer from others. 3. Money is spent in productive investment. Where I don't freeze the deer at all, I simply spend it on the economy, such as by investing in say spear making. Which both increases my wealth (since I own two spears now), but also grew the economy (others can make spears now), while creating zero dept. Well, or potentially dept was that I give you some deer meet and you now owe me a spear, which in turn was more productive dept. (Depending if the relationship is Employer/Employee or Investor/Entrepreneur). Number 3 is where we want to be at, and I'd say is the "idealistic Capitalist model" in a nutshell. It's very important we make sure we remain in #3. The good thing about number 3 is that while it's very possible I remain the richest man, and in fact it might make me richer than even #2 ever would have, since instead of owning all the deers with poor deer production, I now possibly own all deer hunting production, mechanisms, know how, and the whole deer production has become much more efficient, and I can own it's whole process, and maybe even I've now ventured in other things. I've also grown the economy as a whole, and raised the standard for what it means to be the poorest man. In that perspective, the gap between rich and poor isn't as important as the standard of living. The gap might be bigger than in #2, yet everyone is better off. But again, if we're slowly shifting to #2 over #3, then it means that I am becoming richer and richer, widening the gap, and everyone's else's lives are just as harsh as ever. We don't want that, we want #3.
micropresident 5y ago
This is caused by credit money. When you issue currency based on loans, there's always debt associated. For every dollar saved, more than a dollar of liabilities have to exist somewhere. Where's it go? People in debt (aka the poor).
whywhywhywhy 5y ago
Until I start hearing arguments on how we can help poorer people actual earn more and take home more of their paycheck rather than force rich people to earn less I know nothing will ever change.
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lordnacho 5y ago
One thing that needs to be mentioned is how the investments are allocated. It seems to me that many white-collar people are stuck with some very vanilla investments. You can: - Stick your money in a pension fund managed by some professional. This guy has very little incentive to do anything interesting. But you don't have time to look at a bunch of stocks and bonds, so you'll get index + noise - costs. The big thing here is the manager feels constrained, whoever he is. There's a mandate and you have to stick to it, so be conservative. - DIY your investments. Probably this means listed equities or indices. If you're a great stock picker, that's great for you, but the money is simply sat in the stock market waiting for your retirement. Listed firms tend to have the opportunity taken out already, mostly. - Stick your money in a hedge fund. Not everyone is allowed to do this, maybe someone got burned on it in the past. This isn't necessarily much different from option 0, but more leverage and better information might help some of these funds beat the market. As a whole, probably not, but at least you can look at other things than just buy-and-hold some stocks. - Invest in new businesses. You can certainly pony up the money to start a restaurant or a gym or whatever. People do this, heck I'm doing it, but I don't see it much. I get the sense that we'd be much better served with most people plowing their money into local businesses than the stock market. Skin in the local game. But it's also quite hard to build trust, you need to go through a lot of potential partners to find ones you like. Or get lucky and meet someone. - Give your money to a VC firm. Back to agency problems. Does the VC have incentives to build businesses? It seems like the incentive these days is to swing for the fences on all the investments and hope some do well. Might work for the VC, but does this work for society? I'm sure there are a number of burned out unicorns that would have been fine as medium-to-large businesses. - How about PE? Maybe I'm just cynical, but PE seems like extractive financial trickery. Buy a firm, load with debt, pay the PE firm, hope things work out anyway. What happens to the investment? Well it's still gonna be in established firms, often big ones. A lot of that money ends up with management, who will have the same problem that we're thinking about (money from the acquisition incentive burning a hole). - Invest in firms in other countries. You don't know people or legal systems in other places. Big lemon problem.
wahern 5y ago
This was explained better by Michael Pettis in "The U.S. Trade Deficit Isn’t Caused by Low American Savings", https://carnegieendowment.org/chinafinancialmarkets/77009 https://carnegieendowment.org/chinafinancialmarkets/77009 > [I]f savings are already plentiful and interest rates are low, to the extent that all desired investment has been funded, U.S. investment wouldn't rise. If the gap between U.S. investment and U.S. savings is unchanged (and investment doesn't rise), then savings cannot rise. This means that policies designed to raise U.S. savings by $20 can only cause savings in one part of the economy to rise by $20 while simultaneously causing savings in another part to decline by exactly the same amount. The more abstract point is that but for government borrowing (both Federal, state, and municipal) soaking up the glut of cash and redistributing it, unemployment would progressively increase. Pettis' policy argument is that, given this situation (current account deficit driven by foreign dollar holders), government spending should focus on inducing consumption rather than investment as the supply-side of the equation is manifestly maxed out.
mgh2 5y ago
There is something fishy about the focus of these two variables: rich savings and poor debt. It assumes a causality when there might be none- especially when these were not controlled/isolated against other variables. The article also implies that poor mortgage debt might be causing a rise in real state, but fails to consider the manipulated supply and demand of the product itself. More perspective here: https://news.ycombinator.com/item?id=27448175 https://news.ycombinator.com/item?id=27448175

171 points by gamechangr 5y ago

As US income inequality began a marked increase in the 1980s, the richest 1 percent of households increased their savings while the bottom 90 percent fell into debt. Research finds that lenders indirectly used the top 1 percent’s savings to finance this borrowing, essentially enabling the rich to benefit from the bottom 90 percent’s debt repayments. This does not imply causality as the author mistakenly assumes. Maybe the bottom 90% have more debt simply because costs are rising faster than wages and ability to save. Maybe the rich can save more because thy earn more.

deadwing0 5y ago
This. I struggle to see how higher savings by the wealthy can cause me to take on any more debt. Is the argument the wealthy use cash to invest in assets (houses), thus driving up the price and causing middle and lower class people to be forced to borrow more to buy a house?
- kiba 5y ago
  But people do want to own homes, but the problems is debt and the fact that homes are seen as a way to accumulate wealth. Affordable housing clashes with that. Also, the article seem to treats building a new road as an unalloyed good.
  - mason55 5y ago
    > homes are seen as a way to accumulate wealth It's worth having a discussion about whether this makes sense and is something to strive for. Unfortunately, because society has been based on this for so long, the people who spent their lives paying off a 30 year mortgage would never agree to make any changes that would reduce the value of their house. You'd need to come up with a plan to transition away from a house-based model of wealth over a long enough period of time where current home owners don't get screwed but people know what it means to buy a house now. And I don't think any plan that's long-term enough to be sensible could actually survive politics long enough to be successfully implemented.
- js8 5y ago
  Do you think advertisement works? It is certainly possible, using advertising, to convince many people that NOW is the special time when taking on debt is actually OK, because rising house prices lift all boats. (Not really that different from any other gold rush..) Which is what happened before 2008, when there was very little oversight in borrowing (e.g. NINJA loans). We know empirically that if the lenders are not obligated to make sure that the loans can be repayed, predatory lending will occur and cause social problems.
- dastbe 5y ago
  Savings is probably confusing here, because savings change based on your socioeconomic position. People go from not saving anything, to saving cash, to saving in assets. Some of these assets have a poorer counterparty who is getting access to that money in return for repayment + interest. Perversely, the more money is available in these assets, the lower the interest rate and so the more money these counterparties can borrow. This drives up the cost of physical assets being bought with this money, like homes, because the value of the home is dictated by the debt load a buyer can bear. Lower interest rates means you can support more debt, which means someone will take on more debt and outcompete you for that house.
- fancifalmanima 5y ago
  I'm definitely speculating, but I could see banks having a glut of money to loan contributing to the low interest rates that have existed for a while now (thinking of money from a supply/demand perspective). With those lower interest rates leading to more interest in buying homes and pushing up prices (during the subprime crisis, to folks that couldn't necessarily afford it). While you'd also expect a housing construction boom, its certainly plausible that the industry would have to play catch up to demand. (It seems easier to me to hire a realtor to go look at homes than to start or expand a construction business). Zoning/other regulations can also slow down that process. The low interest rates also make larger/more expensive homes more feasible for buyers, due to the fact that a smaller percentage of the monthly payment is interest. I could certainly see ways that the above would lead to an individual having a higher debt load than they otherwise would.
- metrix 5y ago
  They are not forcing you, it's that the 1% have savings and want that savings to make money so it's invested. Portions of that investment go into banks who loan out money to the middle class. The middle class uses this money to buy cars/houses which helps the 1% to increasing their savings, which they then invest a portion of into banks... BUT like another comment discussed, a lot of this is going over seas. Right now this cycle is pushing US asset values higher, but at some point this will come crashing down, and the money that was invested in under inflated markets will be valued correctly/over valued. At which point that money will flow back into the US.
- uuidgen 5y ago
  Banks, having surplus cash, offer low-monthly-payment loans which allows more people to buy them, by the way earning 0.6-0.8 * X to the banks. Since there is a lot of cheap credit price stops constraining the demand side. You can get almost arbitrary large loan with arbitrary long timespan. This causes prices to rise. Houses seem like good investment so wealthy buy them restricting supply side, causing prices to rise even higher. Rising prices make it impossible for most to save for the house. They have to take loans. Now poor people who want house need to pay the inflated price + credit fees on top of that. Sellers see their assets rise in value, creditors see more customers and more revenue. If there was no cheap credit then the prices wouldn't rise so much because nobody would be buying them. Now, I don't know how true is all above but that seems to be the explanation of the issue I've seen many times.
- imtringued 5y ago
  No, nobody is buying your products. Nobody wants to hire you. Nobody is investing in a company that will hire you. If you have no income you must go into debt. It's that simple.
jmholla 5y ago
> This does not imply causality as the author mistakenly assumes. Maybe the bottom 10% have more debt simply because costs are rising faster than wages and ability to save. Maybe the rich can save more because thy earn more. You can't choose one sentence and refute the whole article based on it. It's a part of a whole. The point of the article is to make that causal link.
- rsj_hn 5y ago
  The one sentence is representative of a lack of causal arguments and the use of whimsical speculation to replace providing evidence for said casual arguments. I could argue that liberalization of global capital flows allowed significant foreign investment leading to an abnormally low interest rate regime, which is why everyone (rich and poor) has taken on more debt, and I guarantee you that the rich take on far more debt than the poor. But as the poor tend to have mostly human capital on their balance sheet while the rich have assets, it creates an appearance that the poor have net debt (which they do not) while the rich have net assets (which they do). In fact both the poor and rich are solvent -- have more assets than debt, but the assets of the poor are future wage earnings. Thus in any reduction of interest rates, the poor will disproportionately benefit over the rich and will take advantage of this to increase borrowing. E.g. if you are rich then both your assets and your liabilities will grow in lockstep (at the macro level). But if you are poor, then your assets are your wages which do not grow in lockstep with interest rates. Thus a reduction of interest rates disproportionately helps the poor to borrow more but an increase disproportionately hurts their ability to borrow. These are just some of the interesting effects when you seriously look at debt-dynamics and interest regimes. But in no regime can you make a case that the mere existence of the rich somehow causes the poor to borrow. Yet the reason for low interest rates and the fact that such low rates are responsible for both the behavior of the rich and poor are not covered in this piece. In fact it used to be the case that Rebecca's predecessors would bemoan the fact of how the poor were locked out of credit markets and thus unable to participate in the wealth-creating business of taking on debt to purchase long-lived assets, and thus they had to rent an apartment instead of being able to buy a house, or could not borrow to get a more reliable car on credit, etc. Now that those barriers have been substantially reduced, there is lots of hand-wringing about how the poor are taking on debt. This amnesia is funny to those of us who have been following this debate from times when rates were much higher and the poor borrowed very little. Then the complaint was "why are the rich locking the poor out of credit markets?" Resentment can be stoked in any situation. It is particularly hilarious because Keynes advocated for lowering interest rates in order to "euthanize the rentier" and he blamed the rentier class for keeping rates higher than they should have been. E.g. he blamed the rich for high interest rates. Now the argument is that rich are to blame for low interest rates. Keynes would be rolling over in his grave. But the persistent theme seems to be that the rich are to be blamed. In fact there is nothing wrong with taking on debt. What matters is your ability to service the debt, and in a low interest rate regime, that service capacity is substantially increased, and thus so are debt levels. Perhaps this is not worth the trade off of increased financial fragility. Or perhaps it is -- data must be required and real arguments made. But merely the existence of the debt levels themselves -- again held both by poor and rich -- are not something to be avoided. This blog post doesn't attempt to engage with any of this literature or provide any fact-based arguments about casual mechanisms or whether something is beneficial or harmful. It's just more hand-wringing, which is a shame as debt-dynamics, interest rate regimes, global investment flows and credit constraints are important topics that deserve to be treated seriously rather than as a political football in the resentment olympics.
pmoriarty 5y ago
"Maybe the rich can save more because thy earn more." That's certainly a big part of it, but far from the only one. When you're living paycheck to paycheck you have no money to invest, so the poor are usually limited to earning only as much as their poorly paying jobs will pay them, while the salaries of the rich usually only make up a small to non-existent portion of their wealth. On top of that, at least in the US, capital gains are taxed at a much lower rate than income, so those whose income makes up a large fraction of what they earn are doubly screwed. For the really poor, food expenses are a significant portion of their expenses, and yet many of them live in food deserts where food is not only less nutritious and less varied than what the rich have access to, but that food is often more expensive. If as a poor person you have to take out a payday loan to get by, you're also going to be paying through the nose for that. Predatory lending practices are also widely employed against the poor. If you can't afford your own home (or to own a home but never pay it off), you could wind up paying way more in rent or mortgage payments than if you had bought a home outright in cash and never had to pay any interest on it at all. That's not to mention medical expenses, which often bankrupt people in America... or legal expenses, which the poor often can't afford and wind up going to jail because of. Finally, its the wealthy and powerful who write the laws and and use their connections in and various forms of bribes of government to favor mostly themselves, their friends and families. The poor do not have this sort of pull, and are often led by the nose by the rich to vote against their own interests.
- deleted 5y ago
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majormajor 5y ago
> This does not imply causality as the author mistakenly assumes. Maybe the bottom 90% have more debt simply because costs are rising faster than wages and ability to save. Maybe the rich can save more because thy earn more. If it's easier to borrow money, costs will go up. Look at college education over the past half century, or housing vs interest rates. So if some people start taking on more debt than they should because it's easier, a lot of other people are pushed into it even if they wouldn't have originally when they're priced out by the borrowers.
imtringued 5y ago
>Maybe the bottom 90% have more debt simply because costs are rising faster than wages and ability to save. You just rephrased the article. What you are saying is identical to what the article said. If companies don't borrow money from the wealthy and don't spend their money on hiring people or higher wages then then there are unemployed people who must (emphasis on must) consume (think of food and rent) in excess of their income because their income is 0 and the only way they can keep consuming is by going into debt. Therefore what you and the article said is the same thing.

pmoriarty 5y ago

"Ideally, all those savings would be channeled into productive investments such as research and development, or practical equipment, or new roads, or even new yachts--investments that would promote growth in the economy." It's important to keep in mind that even when that money is spent, there's no guarantee it'll be spent domestically. Just as an example, Jeff Bezos bought his $500 million superyacht from Oceanco, a Dutch yachtmaker. Increasingly, the ultra-rich are, like many of the companies they control, multinational.

kaesar14 5y ago
As vile as the robber barons were, at least they were bounded by the confines of their environment to care at least a bit about their countrymen and have some patriotic tendencies.
- MomoXenosaga 5y ago
  Do we count Africans or the native American tribes?. We have made some progress.
  - cyberlurker 5y ago
    Modern day robber barons aren’t helping those groups either.
    - tootie 5y ago
      I think compared to the Gilded Age they're doing a 1000x better job. Even if it's because they were dragged into doing it. It's easy to point out shortcomings, but don't ignore progress. Think of America as a giant venture-funded experiment in equality. Even if we're 200 years in without a showing a profit, we've had steady revenue growth and loyal customers. Profits will come eventually.
      - kaesar14 5y ago
        How are they doing a better job?

jl2718 5y ago

No. It’s housing prices pumped by federal loan guarantees.

pedro_hab 5y ago
Yeah, the government also artificially suppresses interest rates, making it easier to get mortgages yet somehow the blame goes to the lenders.
- yunohn 5y ago
  > somehow the blame goes to the lenders I find this statement quite tone-deaf. It’s hard to blame people for wanting a roof over their heads.
  - anchpop 5y ago
    Maybe you’re thinking of borrowers? Lenders are the ones who give the loans and make money from interest.
  - imtringued 5y ago
    It's the neoliberal mindset and everyone is falling for it. Pretty much every party in Germany is neoliberal. The irony is that a lot of neoliberal thinking is self defeating. Honestly, after I learned about neoliberalism I came to peace with the world because I know everyone deserves their suffering and there is no injustice. All those republican voters are voting for their own doom. It's fantastic. I no longer need to feel bad about their suffering because there is no contradiction, no conspiracy theory, no trick, no evil cartoon villain behind the scenes.
    - pedro_hab 5y ago
      Can you give an example of a country that archived economic prosperity using leftist policies? I also find your comment on republicans quite wrong, since I don't see many differences between republicans vs democrats. Both have been running ever increasing deficits, each president tops all previous presidents combined. You can't really say any of the US policies have liberal.

vinhboy 5y ago

> Say a corporation issues equity to the wealthy, but instead of spending the proceeds on research or equipment, puts that money into a time deposit at a bank, which in turn uses it to fund a mortgage for a less-affluent household. Am I understanding this correctly? They are saying that because corporations are saving more, the savings become money that can be loaned to people, and because there is more money to loan, the price of everything goes up, therefore hurting the poor unintentionally? That's pretty interesting.

quadrangle 5y ago
Whether they mean it or not, it's sensible. Mortgage amounts correlate to home prices. Consider the most basic idea that if mortgages did not exist, there would be far fewer people who could pay a premium price for a house, and thus the housing market would be forced to cater to the much lower prices and less expensive housing that people could afford without mortgages. I mean, except there's some point where the reality is just untenable, people need to be able to borrow. But the easier it is to borrow, the easier it is for more people to buy more expensive houses and bid up the prices.
- xeromal 5y ago
  ala 2008 jumbo loans
- majormajor 5y ago
  Even more direct is the link between interest rates and house prices. Lower rates push up prices for everyone, you don't get the choice of borrowing X at a better rate to save money every month instead of borrowing X+Y with the same payment if someone else is out there willing to pay X+Y. It's an interesting dynamic of the more reckless moving the market for everyone and harming not just themselves, but also others, and the potential link to more money being available for lending due to inequality is very interesting indeed, because it suggests a nasty negative cycle.
  - mumblemumble 5y ago

nverno 5y ago

They are saying rich people are indirectly financing poor peoples' debt by owning stocks and bonds because corporations are then stockpiling cash. Not very convincing as a causal reason the middle class got buried in debt. Just taking advantage of the rich v. poor narrative

pauldickwin 5y ago
To these journalists that have little understanding of economics, it's always a zero-sum game. They make up their own economics.
- quadrangle 5y ago
  debt and credit are zero-sum. The part that isn't necessarily zero-sum is productivity. So, debt/credit patterns can lead to productivity, depending on the details. But I think the real point here is that when investments are dependent on others' debt and not on other types of returns, there's a whole system that is built on promoting debt, selling people on accepting debt…
  - sudosysgen 5y ago
    Indeed, generally almost everything in economics is at best zero sum outside of productivity.
  - imtringued 5y ago
    That's the reason the US government is running deficits. It's because it is rescuing consumers from the burden of taking on that debt.
  - b9a2cab5 5y ago
    In nominal terms, they are zero-sum. If you consider inflation then debtors have the advantage since we live in an inflationary economy, so wages will keep pace with general inflation but the debt amount remains constant. Debt is an essential part to accelerating growth if used for productive investments (say, a degree in computer science). What the "middle class" (really the working poor but people call it the middle class) are using debt for is not productive; when we have layaway and things like Affirm financing, etc. we have lots of debt being used to purchase luxury goods and services. You can argue the "system" is to blame for people buying electronics on layaway or you can blame the people for being irresponsible. To whoever is going to respond by saying poor people buy food on credit cards: you can't use layaway and Affirm like services for food.

gimmeThaBeet 5y ago

I'm a bit confused reading this, the argument that the 1%+ echelon are ~= to corporations in an aggregate model, and that effectively corporations are underinvesting? Or rather that the 1% are under-consuming, and so any evaluations of net household saving/consumption are skewed because there is dramatically more saving on one side and more aggregate debt on the other. I haven't seen what recent levels of corp/household/gov/balance spending/saving are. I also like to refer to this post for these kind of macro questions. I'm not an economist, but it's interesting to see how all the pieces fit together. https://nathantankus.substack.com/p/where-do-profits-come-from https://nathantankus.substack.com/p/where-do-profits-come-fr...

mentos 5y ago

Wouldn’t the effect of hoarding wealth be anti inflationary? If it’s not being spent then it might as well not exist in which case it’s as if all of the money was confiscated and deleted by the government anyways?

Sevii 5y ago
It isn't being hoarded, it is being lent out.
lurquer 5y ago
Literally hoarding... as in under your mattress? Yes. Instead, your ‘hoarders’ are loaning their money to a bank which then in turns loans many multiples of that money to borrowers.
imtringued 5y ago
Hoarding Bitcoin is deflationary. "Hoarding" USD in a bank account can be deflationary if there is not enough demand for loans or if the borrowed money never reaches the real economy.
pydry 5y ago
>Wouldn’t the effect of hoarding wealth be anti inflationary? Only if it's being hoarded as cash - something almost nobody does. If it's being hoarded in the form of assets, you'll see rampant asset inflation instead.

PaulDavisThe1st 5y ago

Is it just me, or is Chicago Booth beginning to publish more pop-econ articles that question the simplistic reality of the so-called "Chicago School of Economics" ?

vmception 5y ago

> “People get angry about seeing the rich consuming a lot,” Sufi says, “but that’s better than what they’re actually doing.” I’m going to use that line

wvenable 5y ago
Money needs to move to benefit the economy. In my opinion, one of the big problems with the super-rich is they have more money than they can ever spend (over several lifetimes). This money is just siphoned out of the economy. We're taking natural resources and work and converting it into a number in a computer and that's it. There is such a glut of money doing nothing that there is hardly any place to even invest it. You even have companies, like Apple, sitting on massive cash piles. A pandemic can't affect the stock market or housing because all this money needs somewhere to be.
- vmception 5y ago
  The central banks think they can make the money move if they buy everything reputable and force everyone else to consider buying less reputable things. This is somewhat happening but not in great enough numbers, one of the desired examples being SPACs buying startups where VC's and the whole population continue underservicing, the less desired examples being "meme" stocks but it is good when those companies recapitalize with direct issuances, unexpected examples being intangibles and obscure cryptos and I'm not offering an opinion about that, I do know it is not the point of the central banks monetary policy. They want people to be forced to invest in founders without pedigrees. Simple. As we can see, people would rather pay the government to not risk their own money like that, inflation concerns be damned. The hoarded money will really move if the central banks A) stopped buying and B) sold everything What Congress can do: keep wage workers on basic during recessionary periods and don't let the Fed buy bonds and mortgaged backed securities So everything tanks to its natural market price while employers convulse and stop hiring, and more capital efficient organizations replace them, and the unemployment numbers can be ignored because they're fine for now

papito 5y ago

There is another angle. https://awealthofcommonsense.com/2021/05/did-hgtv-ruin-the-housing-market-for-millennials/ https://awealthofcommonsense.com/2021/05/did-hgtv-ruin-the-h... What if young people burry themselves in debt because they want the instagram life now? What if they refuse to live according to their means?

iso1631 5y ago
Vast majority of debt in the US is Tuition, Housing and Medical Complaining about avocado toast won't change that
- papito 5y ago
  Medical is one thing - housing and tuition is completely self-imposed. I make 6 figures in software but I went to New York City College. I graduated with zero debt (in fact, I got paid to study). And I am still renting at 40. Getting an Instagram home takes time and saving for decades. It's always been this way.
  - 1-6 5y ago
    This. I think too many people can think to a friend who purchased their McMansion at 30 and think to themselves that buying a home is unattainable. I realized that it takes constant self-reflection and discipline to build a 20-50% down payment on a 15-year mortgage WHILE socking money away for retirement, 529, and HSA. Granted, rates are lower than they ever have been historically but borrowing to get rich is still leveraging. I get ticked off when talking to real estate agents who only think leveraging is the way. To be honest, I don't have a credit score any longer. It's called manual underwriting!
- nostromo 5y ago
  The article linked is about housing -- specifically younger people buying more house than they can afford. I'm sure a similar argument could be made about education. I personally know a number of people up to their ears in debt for advanced degrees that have no economic value.

beefield 5y ago

And this, in my humble opinion, is the reason why there has been a long term decreasing trend in interest rates for the last 40 years. And it will not reverse before the trend of wealth distribution getting more and more inequal reverses. So get used to the idea of increasing pressure to get functional negative interest rates.

hamilyon2 5y ago

Please explain this one more time to me. I thought banks were literally creating money when handing out credit. Banks are prohibited to loan money on their saving accounts, so amount of credit issued is not directly influenced by amount of money saved. It is rather influenced by regulation on those things.

jfrunyon 5y ago

> After all, a yacht is rooted in the real economy. A good chunk of the money originally spent on the yacht went to pay workers and buy equipment Sure. And then the rest of it went to profit. Knowing the yacht is 454 ft (what's the sqft on that? four digits?), costs $590m, and yet a tricked-out 66,000 sqft megamansion-ranch-thing is worth less than a quarter of that [https://www.latimes.com/business/story/2021-05-04/bill-gates-homes-melinda-gates-net-worth-who-gets-66000-square-foot-mansion https://www.latimes.com/business/story/2021-05-04/bill-gates...], I'm gonna take a guess that there's a loooooot of profit in that yacht. Which means that it's just 1%ers passing money around amongst themselves. (Yes, I'm comparing apples and oranges here a bit, but I really have to question how much of that is going to materials and labor...)

bugzz 5y ago
I'd say the real "problem" with spending on yachts and other luxuries is that it takes real value to make - skilled labourers and valuable materials going to something that doesn't provide that much human happiness. Not saying the ultra rich shouldn't be allowed to spend their money how they want, just that it does seem to have consequences to me.
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orlovs 5y ago

Oh well, yet another publication “rich bad, poor good”. I will leave out payday lending, buying small goods on credit etc. Lets talk about mortgages and student loan. Let’s face it, if you are rich you have become rich somehow or stayed rich ( even harder than first one) you probably understand risk management. What we have got here: you are lending your capital to folks who are less rich (much less trustworthy). Why you are lending to them if risk relatively is pretty high? Actually, its not student loans in most of civilized society is backed by government programs, mortgages is backed by GSEs. You can land money with relatively no risk at all. I am oversimplify but, many problems comes from politician will “help little people/protect little people” or called aswell “to get elected or reelected”. Our friends in government puts incentives to lend money to consumption without almost risk. And I am from Europe/Baltics. We have got our own “helpful programmes”. Like government agency lends you downpayment for mortgage with pretty barbaric rate. So what happened, default downpayment have gone up from 10% to 15-20% to get skin in the game from lender. Who suffers the most? Those who have got these 10% for downpayment.

quantified 5y ago

Can this be seen as simply hoarding money?

didibus 5y ago

I think this is a very important thing to study some more. The entire system is built on the assumption that money goes round, never sits idle, and is always used to productive use in terms of growing production. If it's true that there are issues at that level, we really need to better understand them and address them. If we make things very simplistic. If I'm the only one that has a spear and I hunt a deer with it. I cannot eat it all. I'll have the best parts and a good chunk of it to satiety. Now I'm left with a lot more deer leftovers. If I just froze it and never went hunting again for the next 4 weeks, by just eating more of that frozen deer. Keeping in mind I'm the only one with a spear. That be very bad economically, what are the others to hunt with? What are they all to eat? Now, the morgage loans are like if someone comes and say, could I have some of your frozen deer to eat? And I were to say, yes you can have a little bit, but in repayment you owe me a full deer which you must give me in the next year (which others will need to hunt by hand, since they don't have a spear). Over time, what happens is all hunted deers by everyone goes to me, as everyone owes me a deer. And I now own all hunted deers, trading more of its meat for more repayment of more deers. The issue with this is that there's always a surplus of deer, and yet everyone is in dept and only eating a fraction. In effect, deer production is wasted. Another issue with this, is that it did not contribute to boost production of deers or anything else. A better scenario is that I don't freeze my leftover deer. Instead I trade it to others for other things. If I did this, I create a market for other goods, and I boost the production of more things. Like maybe I trade it to people and I ask in exchange for it to have a second spear built. This allows spear manufacturing to grow, and also it gives me two spears that I can now use to hunt more deer with. Having commissioned this, I also enabled someone else to learn how to make spears, which they can now make for themselves or others. You could assume prior to that they simply didn't have the time to explore making spears, because they constantly needed to hunt for food by hand just to survive. So this explained three scenarios: 1. Money is horded idle, where I just freeze the deer for myself and live off of it for the next 4 weeks until I hunt again. 2. Money is invested in unproductive ways, creating a dept cycle of the poor while boosting my own wealth. Where I loan parts of my frozen deer in exchange for a future full deer from others. 3. Money is spent in productive investment. Where I don't freeze the deer at all, I simply spend it on the economy, such as by investing in say spear making. Which both increases my wealth (since I own two spears now), but also grew the economy (others can make spears now), while creating zero dept. Well, or potentially dept was that I give you some deer meet and you now owe me a spear, which in turn was more productive dept. (Depending if the relationship is Employer/Employee or Investor/Entrepreneur). Number 3 is where we want to be at, and I'd say is the "idealistic Capitalist model" in a nutshell. It's very important we make sure we remain in #3. The good thing about number 3 is that while it's very possible I remain the richest man, and in fact it might make me richer than even #2 ever would have, since instead of owning all the deers with poor deer production, I now possibly own all deer hunting production, mechanisms, know how, and the whole deer production has become much more efficient, and I can own it's whole process, and maybe even I've now ventured in other things. I've also grown the economy as a whole, and raised the standard for what it means to be the poorest man. In that perspective, the gap between rich and poor isn't as important as the standard of living. The gap might be bigger than in #2, yet everyone is better off. But again, if we're slowly shifting to #2 over #3, then it means that I am becoming richer and richer, widening the gap, and everyone's else's lives are just as harsh as ever. We don't want that, we want #3.

micropresident 5y ago

This is caused by credit money. When you issue currency based on loans, there's always debt associated. For every dollar saved, more than a dollar of liabilities have to exist somewhere. Where's it go? People in debt (aka the poor).

whywhywhywhy 5y ago

Until I start hearing arguments on how we can help poorer people actual earn more and take home more of their paycheck rather than force rich people to earn less I know nothing will ever change.

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lordnacho 5y ago

One thing that needs to be mentioned is how the investments are allocated. It seems to me that many white-collar people are stuck with some very vanilla investments. You can: - Stick your money in a pension fund managed by some professional. This guy has very little incentive to do anything interesting. But you don't have time to look at a bunch of stocks and bonds, so you'll get index + noise - costs. The big thing here is the manager feels constrained, whoever he is. There's a mandate and you have to stick to it, so be conservative. - DIY your investments. Probably this means listed equities or indices. If you're a great stock picker, that's great for you, but the money is simply sat in the stock market waiting for your retirement. Listed firms tend to have the opportunity taken out already, mostly. - Stick your money in a hedge fund. Not everyone is allowed to do this, maybe someone got burned on it in the past. This isn't necessarily much different from option 0, but more leverage and better information might help some of these funds beat the market. As a whole, probably not, but at least you can look at other things than just buy-and-hold some stocks. - Invest in new businesses. You can certainly pony up the money to start a restaurant or a gym or whatever. People do this, heck I'm doing it, but I don't see it much. I get the sense that we'd be much better served with most people plowing their money into local businesses than the stock market. Skin in the local game. But it's also quite hard to build trust, you need to go through a lot of potential partners to find ones you like. Or get lucky and meet someone. - Give your money to a VC firm. Back to agency problems. Does the VC have incentives to build businesses? It seems like the incentive these days is to swing for the fences on all the investments and hope some do well. Might work for the VC, but does this work for society? I'm sure there are a number of burned out unicorns that would have been fine as medium-to-large businesses. - How about PE? Maybe I'm just cynical, but PE seems like extractive financial trickery. Buy a firm, load with debt, pay the PE firm, hope things work out anyway. What happens to the investment? Well it's still gonna be in established firms, often big ones. A lot of that money ends up with management, who will have the same problem that we're thinking about (money from the acquisition incentive burning a hole). - Invest in firms in other countries. You don't know people or legal systems in other places. Big lemon problem.

wahern 5y ago

This was explained better by Michael Pettis in "The U.S. Trade Deficit Isn’t Caused by Low American Savings", https://carnegieendowment.org/chinafinancialmarkets/77009 https://carnegieendowment.org/chinafinancialmarkets/77009 > [I]f savings are already plentiful and interest rates are low, to the extent that all desired investment has been funded, U.S. investment wouldn't rise. If the gap between U.S. investment and U.S. savings is unchanged (and investment doesn't rise), then savings cannot rise. This means that policies designed to raise U.S. savings by $20 can only cause savings in one part of the economy to rise by $20 while simultaneously causing savings in another part to decline by exactly the same amount. The more abstract point is that but for government borrowing (both Federal, state, and municipal) soaking up the glut of cash and redistributing it, unemployment would progressively increase. Pettis' policy argument is that, given this situation (current account deficit driven by foreign dollar holders), government spending should focus on inducing consumption rather than investment as the supply-side of the equation is manifestly maxed out.

mgh2 5y ago

There is something fishy about the focus of these two variables: rich savings and poor debt. It assumes a causality when there might be none- especially when these were not controlled/isolated against other variables. The article also implies that poor mortgage debt might be causing a rise in real state, but fails to consider the manipulated supply and demand of the product itself. More perspective here: https://news.ycombinator.com/item?id=27448175 https://news.ycombinator.com/item?id=27448175