6 ms·

The rich get richer and rates get lower

66 points by bifftastic 5y ago

msandford 5y ago
We have an entity which literally fixes the interest rate through a variety of methods and yet we're talking about why rates are the way they are. Boggles the mind. It'd be like arguing about why rents aren't going up in a rent controlled neighborhood. "Because there's excess housing and not enough renters" doesn't seem to really explain the process.
- bildung 5y ago
  > We have an entity which literally fixes the interest rate through a variety of methods and yet we're talking about why rates are the way they are. Boggles the mind. If you'd read just a tiny bit into macro economics (every intro textbook will work), it stops doing so.
- onlyrealcuzzo 5y ago
  You seem to be implying that Central Banks are lowering interest rates just because. I think the point of the FT article is that inequality is causing there to be a need for lower interest rates, which causes more inequality, which causes even lower interest rates, which... Virtuous / vicious cycle, depending on which side you're on.
  - rolobio 5y ago
    It’s only virtuous until the money runs out. Then we will see far worse poverty than ever would have been. When the US prints money we steal from every person in the world who uses a Dollar backed currency. I’m not sure how much longer they will tolerate this. They’re already not buying our bonds…
    - wonderwonder 5y ago
      Honestly I think they will continue to tolerate it as there is not really much of an alternative. The world needs a unit of exchange, if it is not the dollar then what would it be? Maybe eventually something like BTC / ETH serves as the unit of exchange and is then converted back into the countries native currency?
      - rolobio 5y ago
        I think the BRICS system is likely. But we will have to wait and see!
      - bawana 5y ago
        China is producing their state owned e-yuan. They are rolling it now and in 2 years that will be the currency most transactions they do will require. 200 million has already been issued as a pilot. When e-yuan becomes the de facto reserve currency of trade, the dollar will suffer thge same tragedy as iceland. The US will need to take out loans from the IMF, from China, from other nations in ASIA to buy e-yuan. China will pay us back in the dollars they have but will demand e-yuan for anything we want to buy from them. Now the Fed is enjoying its last hurrah. Printing money like its going out of style (which in fact it is) (Actually the Treasury prints the money but they wouldnt print unless the Fed issued bills and bonds to sell.) When austerity hits home, the rich and privileged classes will have a new 'news bite' with which to beat the 'lazy unemployed'. Helicopter money will disappear. Austerity measures will include wage and price controls (like Nixon did in 1970s), sky high interest rates. And a booming underground economy as Americans learn to dodge taxes like the Greeks do. We will become like England. They were the host state to Arab oil money. We will see China buying up valuable parts of the US simply because we will have nothing else they want. Dont fool yourself, their weapons have reached parity withours. Their chip industry is at most 5 years behind ours. Their ML is at parity with 'ours' -facebook, google. OTOH, facebook and google might just move to china for the free-er capitalism they will have.
        stx 5y ago
        > Austerity measures will include wage and price controls (like Nixon did in 1970s), sky high interest rates. ^This is my biggest concern. Thus far real estate has been my favorite investment. I assume though if interest rates go up peoples buying power and hence prices will go down. If I liquidate my investments I will owe taxes and I fear inflation will eat up the cash value. Buy e-yuan? Leave the USA?
    - chii 5y ago
      > They’re already not buying our bonds… really? Given that US treasury bonds have some of the lowest yield, it means that it must be currently being bought up (which pushes yield down). Bonds from countries like argentina have yields at around 47% - because nobody would buy them otherwise as they are hugely risky. See http://www.worldgovernmentbonds.com/country/argentina/ http://www.worldgovernmentbonds.com/country/argentina/
      - rolobio 5y ago
        About 40% of our debt is owned by the Federal Reserve. That number is increasing every year. China has been dumping our bonds as fast as they can. Our bonds are cheap because we can offload them onto the Fed.
        MR4D 5y ago
        According to the US Treasury, the Chinese are not dumping bonds at all. [0] [1] Side-note: The Chinese have to own treasuries because the US buys so much stuff from them. If they hurt the US currency relative to their own, then Chinese goods would become more expensive for Americans, and the US would buy less. That would not be good for an economy like China's that has a trade surplus with the US in the range of hundreds of billions of dollars per year. [2] [0] - https://ticdata.treasury.gov/Publish/mfh.txt https://ticdata.treasury.gov/Publish/mfh.txt [1] - https://www.bloomberg.com/news/articles/2021-04-15/china-s-holdings-of-u-s-treasuries-hit-highest-since-july-2019 https://www.bloomberg.com/news/articles/2021-04-15/china-s-h... [2] - https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china https://ustr.gov/countries-regions/china-mongolia-taiwan/peo...
        throw0101a 5y ago
        > About 40% of our debt is owned by the Federal Reserve. AFAICT: * US federal debt held by Fed Reserve Banks: $5.6T * US debt held by foreign and international investors: 7T * Debt held by private private investors: 17T See, which while having a "2018" URL, has an up-to-date embedded graph: * https://fredblog.stlouisfed.org/2018/04/whos-buying-treasuries/ https://fredblog.stlouisfed.org/2018/04/whos-buying-treasuri... 17+7+5.6=29.6. 5.6/29.6 = 19%. > That number is increasing every year. It was rising up to 2014, then held fairly steady between 2014 and 2018, and then started decreasing until the drama of 2020 kicked in: * https://fred.stlouisfed.org/series/TREAST https://fred.stlouisfed.org/series/TREAST
    - throw0101a 5y ago
      > When the US prints money The vast majority of money that is created in modern credit-based economies is via bank loans, not central banks. Cullen Roche the very informative paper "Understanding the Modern Monetary System" ten years ago, and it's still relevant: > In many market based systems such as the USA, the money supply is essentially privatized and controlled by private banks that compete to create loans which create deposits (money). Contrary to popular opinion, governments in such a system do not directly control the money supply nor do they create most of the money. * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 * https://rationalreminder.ca/podcast/132 https://rationalreminder.ca/podcast/132 * https://www.youtube.com/watch?v=uZi4QE_EfCw https://www.youtube.com/watch?v=uZi4QE_EfCw This is especially true in places where reserve requirement no longer exist, e.g., Canada got rid of them in the 1990s.
      - vdqtp3 5y ago
        The US Dollar M1 money supply increased by 66.5% and M2 by 25.4% between Dec 2019 and Dec 2020 [0]. I'd give you more current data, but the Fed stopped reporting the overall changes and M2 in general in early 2021. The ostensible reasons for that depend on how tight your tinfoil hat is, but plenty of money is created by the Fed, and that number hit trillions in the last 18 months. 0: https://www.federalreserve.gov/releases/h6/20210128/ https://www.federalreserve.gov/releases/h6/20210128/
        onlyrealcuzzo 5y ago
        The Fed is still reporting M3: https://fred.stlouisfed.org/series/MABMM301USM189S https://fred.stlouisfed.org/series/MABMM301USM189S It's "only" up 31.76% since Fed 2020 / before they started messing around. It was already regularly increasing by ~7% per year - so you'd expect close to a ~10% difference. So we've got about ~20% more M3 than you would otherwise expect. If they're trying to cover up data, they're doing a bad job.
        vdqtp3 5y ago
        Thanks for the info. I had been referring to the Fed's weekly releases, which didn't include that. I went to look into why, and found "Since 2006, M3 is no longer tracked by the Federal Reserve. ... However, the Federal Reserve Bank of St. Louis and some other sources still publish M3 figures for economic data purposes" Regardless, 7% is already ridiculous, and over 20% beyond that is absurd.
- henron 5y ago
  T bond yields are determined by auction, so the Fed does not have full discretion over long term interest rates. That's why the 30yr yield has fluctuated between 1.6-2.5% this year even though the overnight rate has not changed.
  - nostrademons 5y ago
    The Fed is a participant in that auction with a large ($80B/month) budget and a target interest rate of 0-0.25%, though. You don't have much of an incentive to bid low if you know the Fed is going to swoop in and buy the bonds anyway.
    - panarky 5y ago
      Through July, $11.5 trillion of new Treasury securities have been issued. The Fed buying $80B/month is less than 5% of what was issued. Source: https://www.sifma.org/resources/research/us-treasury-securities-statistics/ https://www.sifma.org/resources/research/us-treasury-securit...
stuaxo 5y ago
The rich take money out of the system and further entrench their position.
- thehappypm 5y ago
  Everyone does this, I mean do you expect your 401(k) to have a return on investment? Do you feel guilty about your retirement funds taking money out of the system ?
  - pope_meat 5y ago
    As a poor person, 100% of money goes back in to the market, not an investment/retirement account, because rent and food are a bit of a priority.
    - thehappypm 5y ago
      You’re right, “everyone” was a stretch, not everyone has retirement accounts. But a large portion of Americans do. And what do people do with those returns? They spend them! People don’t want to die with a huge 401(k).
mattmcknight 5y ago
I wonder if this is an artifact of how they are looking at the savings rate. If you think of someone wealthy like Bezos, he is rich on paper because the value of his shares of Amazon increased. This is not taking any liquidity out of the system. It's not "excess savings" because it's not income that is being saved. Of course, he isn't typical of the top decile, but is typical of the most wealthy. I wonder if this is a bit like Piketty, where the driver was actually real estate appreciation. For the top decile, they are are still putting the most money into real estate, and the prices continue to be bid up. Real estate is where prices are most directly driven by interest rates that allow people to borrow ever more. So maybe their "excess savings" is just bidding up the price of housing.
- wonderwonder 5y ago
  Amazon's increasing share price would be a result of this though wouldn't it? Interest rates are low on savings accounts so the wealthy invest in the stock market driving up equity prices. So Bezos' paper wealth sky rockets because of the overall trend of the wealthy saving instead of spending.
  - mattmcknight 5y ago
    I am sure there is a little bit of that, but only a few shares have to trade to push prices up. My point was that Bezos' wealth didn't come from his savings. It also doesn't match up with the argument that excessive savings are pushing interest rates down, because buying stocks doesn't push interest rates down. That's why I said something seems off in what they are counting as savings. The article states: "the savings of the American rich reappear, instead, as debt, owed by the government or by lower-income US households" I really don't see how they are claiming this would work. The rich I know are not mainly buying consumer debt or treasuries- maybe the occasional tax free municipal bond. On the other hand, the Fed is buying tons of corporate bonds. It seems a lot of handwaving is being done about a supposed 21.1% savings rate for top 10% in income. The claim is that they are using that to buy assets that reduce interest rates. I finally read the paper and see the definition of savings rate is very weird (to a non-expert). It could be completely explained by people in the top decile of income paying more for houses and having less debt on them.
henron 5y ago
As long as the real rate of return is positive and wealthy people have a higher income or save a higher percentage of their income, inequality will increase. Hence inequality almost(?) always increases in times of stability. You don't need low interest rates to tell that story.
- fny 5y ago
  This isn't the transfer mechanism. When interest rates decrease, leverage is cheap and financial asset prices balloon, so the rich become far richer. The problem with crises is that the rich are often the only group with enough of a cash balance to take advantage of fire sales that happen. Banks also become far more restrictive in lending to those without hefty collateral buffers in a crisis.
  - NewLogic 5y ago
    This time the banks have learnt the govs of the world aren't willing to let anyone go under, so have been making out like bandits lending out cheap money.
sebastianconcpt 5y ago
There is no problem in the rich getting richer, the problem is that we need to smooth the friction for more and more people to grow.
- sebastianconcpt 5y ago
  Oh it got downvoted. So it seems that for some, is perfectly fine to promote the desire that more people not be richer. Would that be envy or evil?
robfig 5y ago
As a millenial with a good chunk of his net worth in property, it seems clear that real estate prices are inflated by the Govt via mortgage rates, and I am super nervous about how this plays out now that they are near zero in conjunction with QE. Nowhere to go but down? Yikes
- stx 5y ago
  Whats your plan to survive this possibility? Stick it out and just expect smaller returns once property prices deflate?
michael1999 5y ago
I've thought that the baby boom savings cycle explained most of it, but neat to see some numbers contesting that. But this paper seems to assume that US asset prices are determined entirely by domestic demand which seems wild in a world awash with sovereign wealth funds, pension plans, diversified savers, and emerging market wealth seeking a safe haven. I see some work attributing pensions, etc. to demographic deciles, but ctrl-F "foreign" comes up 0. Does anyone know of any estimates of what fraction of net inflow into US financial assets are domestic vs foreign?

66 points by bifftastic 5y ago

We have an entity which literally fixes the interest rate through a variety of methods and yet we're talking about why rates are the way they are. Boggles the mind. It'd be like arguing about why rents aren't going up in a rent controlled neighborhood. "Because there's excess housing and not enough renters" doesn't seem to really explain the process.

bildung 5y ago
> We have an entity which literally fixes the interest rate through a variety of methods and yet we're talking about why rates are the way they are. Boggles the mind. If you'd read just a tiny bit into macro economics (every intro textbook will work), it stops doing so.
onlyrealcuzzo 5y ago
You seem to be implying that Central Banks are lowering interest rates just because. I think the point of the FT article is that inequality is causing there to be a need for lower interest rates, which causes more inequality, which causes even lower interest rates, which... Virtuous / vicious cycle, depending on which side you're on.
- rolobio 5y ago
  It’s only virtuous until the money runs out. Then we will see far worse poverty than ever would have been. When the US prints money we steal from every person in the world who uses a Dollar backed currency. I’m not sure how much longer they will tolerate this. They’re already not buying our bonds…
  - wonderwonder 5y ago
    Honestly I think they will continue to tolerate it as there is not really much of an alternative. The world needs a unit of exchange, if it is not the dollar then what would it be? Maybe eventually something like BTC / ETH serves as the unit of exchange and is then converted back into the countries native currency?
    - rolobio 5y ago
      I think the BRICS system is likely. But we will have to wait and see!
    - bawana 5y ago
      China is producing their state owned e-yuan. They are rolling it now and in 2 years that will be the currency most transactions they do will require. 200 million has already been issued as a pilot. When e-yuan becomes the de facto reserve currency of trade, the dollar will suffer thge same tragedy as iceland. The US will need to take out loans from the IMF, from China, from other nations in ASIA to buy e-yuan. China will pay us back in the dollars they have but will demand e-yuan for anything we want to buy from them. Now the Fed is enjoying its last hurrah. Printing money like its going out of style (which in fact it is) (Actually the Treasury prints the money but they wouldnt print unless the Fed issued bills and bonds to sell.) When austerity hits home, the rich and privileged classes will have a new 'news bite' with which to beat the 'lazy unemployed'. Helicopter money will disappear. Austerity measures will include wage and price controls (like Nixon did in 1970s), sky high interest rates. And a booming underground economy as Americans learn to dodge taxes like the Greeks do. We will become like England. They were the host state to Arab oil money. We will see China buying up valuable parts of the US simply because we will have nothing else they want. Dont fool yourself, their weapons have reached parity withours. Their chip industry is at most 5 years behind ours. Their ML is at parity with 'ours' -facebook, google. OTOH, facebook and google might just move to china for the free-er capitalism they will have.
      - stx 5y ago
        > Austerity measures will include wage and price controls (like Nixon did in 1970s), sky high interest rates. ^This is my biggest concern. Thus far real estate has been my favorite investment. I assume though if interest rates go up peoples buying power and hence prices will go down. If I liquidate my investments I will owe taxes and I fear inflation will eat up the cash value. Buy e-yuan? Leave the USA?
  - chii 5y ago
    > They’re already not buying our bonds… really? Given that US treasury bonds have some of the lowest yield, it means that it must be currently being bought up (which pushes yield down). Bonds from countries like argentina have yields at around 47% - because nobody would buy them otherwise as they are hugely risky. See http://www.worldgovernmentbonds.com/country/argentina/ http://www.worldgovernmentbonds.com/country/argentina/
    - rolobio 5y ago
      About 40% of our debt is owned by the Federal Reserve. That number is increasing every year. China has been dumping our bonds as fast as they can. Our bonds are cheap because we can offload them onto the Fed.
      - MR4D 5y ago
        According to the US Treasury, the Chinese are not dumping bonds at all. [0] [1] Side-note: The Chinese have to own treasuries because the US buys so much stuff from them. If they hurt the US currency relative to their own, then Chinese goods would become more expensive for Americans, and the US would buy less. That would not be good for an economy like China's that has a trade surplus with the US in the range of hundreds of billions of dollars per year. [2] [0] - https://ticdata.treasury.gov/Publish/mfh.txt https://ticdata.treasury.gov/Publish/mfh.txt [1] - https://www.bloomberg.com/news/articles/2021-04-15/china-s-holdings-of-u-s-treasuries-hit-highest-since-july-2019 https://www.bloomberg.com/news/articles/2021-04-15/china-s-h... [2] - https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china https://ustr.gov/countries-regions/china-mongolia-taiwan/peo...
      - throw0101a 5y ago
        > About 40% of our debt is owned by the Federal Reserve. AFAICT: * US federal debt held by Fed Reserve Banks: $5.6T * US debt held by foreign and international investors: 7T * Debt held by private private investors: 17T See, which while having a "2018" URL, has an up-to-date embedded graph: * https://fredblog.stlouisfed.org/2018/04/whos-buying-treasuries/ https://fredblog.stlouisfed.org/2018/04/whos-buying-treasuri... 17+7+5.6=29.6. 5.6/29.6 = 19%. > That number is increasing every year. It was rising up to 2014, then held fairly steady between 2014 and 2018, and then started decreasing until the drama of 2020 kicked in: * https://fred.stlouisfed.org/series/TREAST https://fred.stlouisfed.org/series/TREAST
  - throw0101a 5y ago
    > When the US prints money The vast majority of money that is created in modern credit-based economies is via bank loans, not central banks. Cullen Roche the very informative paper "Understanding the Modern Monetary System" ten years ago, and it's still relevant: > In many market based systems such as the USA, the money supply is essentially privatized and controlled by private banks that compete to create loans which create deposits (money). Contrary to popular opinion, governments in such a system do not directly control the money supply nor do they create most of the money. * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 * https://rationalreminder.ca/podcast/132 https://rationalreminder.ca/podcast/132 * https://www.youtube.com/watch?v=uZi4QE_EfCw https://www.youtube.com/watch?v=uZi4QE_EfCw This is especially true in places where reserve requirement no longer exist, e.g., Canada got rid of them in the 1990s.
    - vdqtp3 5y ago
      The US Dollar M1 money supply increased by 66.5% and M2 by 25.4% between Dec 2019 and Dec 2020 [0]. I'd give you more current data, but the Fed stopped reporting the overall changes and M2 in general in early 2021. The ostensible reasons for that depend on how tight your tinfoil hat is, but plenty of money is created by the Fed, and that number hit trillions in the last 18 months. 0: https://www.federalreserve.gov/releases/h6/20210128/ https://www.federalreserve.gov/releases/h6/20210128/
      - onlyrealcuzzo 5y ago
        The Fed is still reporting M3: https://fred.stlouisfed.org/series/MABMM301USM189S https://fred.stlouisfed.org/series/MABMM301USM189S It's "only" up 31.76% since Fed 2020 / before they started messing around. It was already regularly increasing by ~7% per year - so you'd expect close to a ~10% difference. So we've got about ~20% more M3 than you would otherwise expect. If they're trying to cover up data, they're doing a bad job.
        vdqtp3 5y ago
        Thanks for the info. I had been referring to the Fed's weekly releases, which didn't include that. I went to look into why, and found "Since 2006, M3 is no longer tracked by the Federal Reserve. ... However, the Federal Reserve Bank of St. Louis and some other sources still publish M3 figures for economic data purposes" Regardless, 7% is already ridiculous, and over 20% beyond that is absurd.
henron 5y ago
T bond yields are determined by auction, so the Fed does not have full discretion over long term interest rates. That's why the 30yr yield has fluctuated between 1.6-2.5% this year even though the overnight rate has not changed.
- nostrademons 5y ago
  The Fed is a participant in that auction with a large ($80B/month) budget and a target interest rate of 0-0.25%, though. You don't have much of an incentive to bid low if you know the Fed is going to swoop in and buy the bonds anyway.
  - panarky 5y ago
    Through July, $11.5 trillion of new Treasury securities have been issued. The Fed buying $80B/month is less than 5% of what was issued. Source: https://www.sifma.org/resources/research/us-treasury-securities-statistics/ https://www.sifma.org/resources/research/us-treasury-securit...

stuaxo 5y ago

The rich take money out of the system and further entrench their position.

thehappypm 5y ago
Everyone does this, I mean do you expect your 401(k) to have a return on investment? Do you feel guilty about your retirement funds taking money out of the system ?
- pope_meat 5y ago
  As a poor person, 100% of money goes back in to the market, not an investment/retirement account, because rent and food are a bit of a priority.
  - thehappypm 5y ago
    You’re right, “everyone” was a stretch, not everyone has retirement accounts. But a large portion of Americans do. And what do people do with those returns? They spend them! People don’t want to die with a huge 401(k).

mattmcknight 5y ago

I wonder if this is an artifact of how they are looking at the savings rate. If you think of someone wealthy like Bezos, he is rich on paper because the value of his shares of Amazon increased. This is not taking any liquidity out of the system. It's not "excess savings" because it's not income that is being saved. Of course, he isn't typical of the top decile, but is typical of the most wealthy. I wonder if this is a bit like Piketty, where the driver was actually real estate appreciation. For the top decile, they are are still putting the most money into real estate, and the prices continue to be bid up. Real estate is where prices are most directly driven by interest rates that allow people to borrow ever more. So maybe their "excess savings" is just bidding up the price of housing.

wonderwonder 5y ago
Amazon's increasing share price would be a result of this though wouldn't it? Interest rates are low on savings accounts so the wealthy invest in the stock market driving up equity prices. So Bezos' paper wealth sky rockets because of the overall trend of the wealthy saving instead of spending.
- mattmcknight 5y ago
  I am sure there is a little bit of that, but only a few shares have to trade to push prices up. My point was that Bezos' wealth didn't come from his savings. It also doesn't match up with the argument that excessive savings are pushing interest rates down, because buying stocks doesn't push interest rates down. That's why I said something seems off in what they are counting as savings. The article states: "the savings of the American rich reappear, instead, as debt, owed by the government or by lower-income US households" I really don't see how they are claiming this would work. The rich I know are not mainly buying consumer debt or treasuries- maybe the occasional tax free municipal bond. On the other hand, the Fed is buying tons of corporate bonds. It seems a lot of handwaving is being done about a supposed 21.1% savings rate for top 10% in income. The claim is that they are using that to buy assets that reduce interest rates. I finally read the paper and see the definition of savings rate is very weird (to a non-expert). It could be completely explained by people in the top decile of income paying more for houses and having less debt on them.

henron 5y ago

As long as the real rate of return is positive and wealthy people have a higher income or save a higher percentage of their income, inequality will increase. Hence inequality almost(?) always increases in times of stability. You don't need low interest rates to tell that story.

fny 5y ago
This isn't the transfer mechanism. When interest rates decrease, leverage is cheap and financial asset prices balloon, so the rich become far richer. The problem with crises is that the rich are often the only group with enough of a cash balance to take advantage of fire sales that happen. Banks also become far more restrictive in lending to those without hefty collateral buffers in a crisis.
- NewLogic 5y ago
  This time the banks have learnt the govs of the world aren't willing to let anyone go under, so have been making out like bandits lending out cheap money.

sebastianconcpt 5y ago

There is no problem in the rich getting richer, the problem is that we need to smooth the friction for more and more people to grow.

sebastianconcpt 5y ago
Oh it got downvoted. So it seems that for some, is perfectly fine to promote the desire that more people not be richer. Would that be envy or evil?

robfig 5y ago

As a millenial with a good chunk of his net worth in property, it seems clear that real estate prices are inflated by the Govt via mortgage rates, and I am super nervous about how this plays out now that they are near zero in conjunction with QE. Nowhere to go but down? Yikes

stx 5y ago
Whats your plan to survive this possibility? Stick it out and just expect smaller returns once property prices deflate?

michael1999 5y ago

I've thought that the baby boom savings cycle explained most of it, but neat to see some numbers contesting that. But this paper seems to assume that US asset prices are determined entirely by domestic demand which seems wild in a world awash with sovereign wealth funds, pension plans, diversified savers, and emerging market wealth seeking a safe haven. I see some work attributing pensions, etc. to demographic deciles, but ctrl-F "foreign" comes up 0. Does anyone know of any estimates of what fraction of net inflow into US financial assets are domestic vs foreign?