5 ms·

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 o

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.
  - ItsMonkk 5y ago
    > because buying stocks doesn't push interest rates down But it does. Either money can go into consumption goods, or it can go into investment goods. If it goes to investment goods, it does not go to consumption goods(this statement seems wrong to me, someone sold the stock and now has money, which they could spend on consumption, and yet seems to be true. Where is all this money going? Why does the M2V fall? If anybody can bring feedback on this I would appreciate it.) The Fed has an inflation target of 2%, and their main path to doing so is by balancing the creation of new money by changing the interest rate. When money is invested, inflation as tracked by PCE stays low. Therefore the Fed needs to drop interest rates further to hit their target. Who can take out the new debt by lower rates? The people with the most creditworthiness. The rich. What do they do with that debt? Invest it. Who collectively creates the most debt? Companies creating bonds to buyback their own stock. The more wealth inequality there is, the more that money goes to investments, the less it effects consumption, the less of an effect changing interest rates has on inflation. But it's a trap, as money can at any time flip from investment goods to consumption goods. On a dime these savers can choose to spend and suddenly we get way to much inflation. So the Fed has to ensure that investment goods always provide more long-term utility than consumption goods. But by investment goods out-competing, this only makes the problem worse. Wealth inequality grows further. They have to be even more sure that the wealthy choose investments. The Fed becomes even less able to move the inflation rate higher. Vicious cycle. We've been going down this road for 50 years so far. Anytime the Effective Fed Rate has been above the 30 year[0], we get a yield curve inversion and soon run into a recession. I believe that's because anytime that the yield curve inverts, the wealthy work out that it is better for their money to be in consumption goods than investment goods, and thus they start DCA their funds out of the stock market, which causes a crash. But take a second look at that chart. The 30 year keeps dropping. Will the 30 year hit 0? Will it go negative? If it does go negative, thanks to the yield curve recession hat would follow, does the Fed Rate need to go negative to follow it? It seems we've got about 10 years to answer these questions before it reaches 0. And remember, 15% rate -> 7.5% is the same difference as 4% to 2%, which is the same as 0.5% to 0.25% and 0.0005% to 0.00025%. We've got so many M2 doublings still ahead of us. [0]: https://fred.stlouisfed.org/graph/?g=ENDs https://fred.stlouisfed.org/graph/?g=ENDs
- mywittyname 5y ago
  A lot of wealthyish people are borrowing against their portfolios to finance their lifestyles, under the old banker adage of borrow at 3%, invest at 10%... This kind of lending used to be reserved for pretty wealthy people, and honestly never made much sense in the era of 8-10% interest rates. But now, interest rates are sub-inflationary and there are tons of companies out there willing to give low-interest loans to Joe Consumer. Almost anyone can get a 2% loan against a quarter of your portfolio from online investment firms. At that point, you'd be crazy to liquidate your investments. Even if your investments did nothing, it would take years of interest payments just to exceed the capital gains tax on liquidating it. Then there's the fact that most major purchase (housing, cars) can be readily financed at low interest rates without needing a huge investment portfolio. We might be in a Too Big To Fail moment with interest rates. If they go up too much, a lot of leveraged people who've seen staggering returns might be forced to liquidate their holdings, driving down prices and triggering margin calls on people who are buy-and-hold types, causing a feedback loop.
  - jjeaff 5y ago
    >borrow at 3% invest at 10% There is a reason that is an old banker's adage. My response would be, why would you loan to me at 3 when you could invest at 10? The answer is risk. The banker knows how to calculate risk.
    - wetjen 5y ago
      That is certainly part of the answer. The other part is that the banker doesn’t have an option to directly invest the funds. Banks are constrained in this regard. Money earmarked for lending cannot instead be invested by the bank.

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.
- ItsMonkk 5y ago
  > because buying stocks doesn't push interest rates down But it does. Either money can go into consumption goods, or it can go into investment goods. If it goes to investment goods, it does not go to consumption goods(this statement seems wrong to me, someone sold the stock and now has money, which they could spend on consumption, and yet seems to be true. Where is all this money going? Why does the M2V fall? If anybody can bring feedback on this I would appreciate it.) The Fed has an inflation target of 2%, and their main path to doing so is by balancing the creation of new money by changing the interest rate. When money is invested, inflation as tracked by PCE stays low. Therefore the Fed needs to drop interest rates further to hit their target. Who can take out the new debt by lower rates? The people with the most creditworthiness. The rich. What do they do with that debt? Invest it. Who collectively creates the most debt? Companies creating bonds to buyback their own stock. The more wealth inequality there is, the more that money goes to investments, the less it effects consumption, the less of an effect changing interest rates has on inflation. But it's a trap, as money can at any time flip from investment goods to consumption goods. On a dime these savers can choose to spend and suddenly we get way to much inflation. So the Fed has to ensure that investment goods always provide more long-term utility than consumption goods. But by investment goods out-competing, this only makes the problem worse. Wealth inequality grows further. They have to be even more sure that the wealthy choose investments. The Fed becomes even less able to move the inflation rate higher. Vicious cycle. We've been going down this road for 50 years so far. Anytime the Effective Fed Rate has been above the 30 year[0], we get a yield curve inversion and soon run into a recession. I believe that's because anytime that the yield curve inverts, the wealthy work out that it is better for their money to be in consumption goods than investment goods, and thus they start DCA their funds out of the stock market, which causes a crash. But take a second look at that chart. The 30 year keeps dropping. Will the 30 year hit 0? Will it go negative? If it does go negative, thanks to the yield curve recession hat would follow, does the Fed Rate need to go negative to follow it? It seems we've got about 10 years to answer these questions before it reaches 0. And remember, 15% rate -> 7.5% is the same difference as 4% to 2%, which is the same as 0.5% to 0.25% and 0.0005% to 0.00025%. We've got so many M2 doublings still ahead of us. [0]: https://fred.stlouisfed.org/graph/?g=ENDs https://fred.stlouisfed.org/graph/?g=ENDs
mywittyname 5y ago
A lot of wealthyish people are borrowing against their portfolios to finance their lifestyles, under the old banker adage of borrow at 3%, invest at 10%... This kind of lending used to be reserved for pretty wealthy people, and honestly never made much sense in the era of 8-10% interest rates. But now, interest rates are sub-inflationary and there are tons of companies out there willing to give low-interest loans to Joe Consumer. Almost anyone can get a 2% loan against a quarter of your portfolio from online investment firms. At that point, you'd be crazy to liquidate your investments. Even if your investments did nothing, it would take years of interest payments just to exceed the capital gains tax on liquidating it. Then there's the fact that most major purchase (housing, cars) can be readily financed at low interest rates without needing a huge investment portfolio. We might be in a Too Big To Fail moment with interest rates. If they go up too much, a lot of leveraged people who've seen staggering returns might be forced to liquidate their holdings, driving down prices and triggering margin calls on people who are buy-and-hold types, causing a feedback loop.
- jjeaff 5y ago
  >borrow at 3% invest at 10% There is a reason that is an old banker's adage. My response would be, why would you loan to me at 3 when you could invest at 10? The answer is risk. The banker knows how to calculate risk.
  - wetjen 5y ago
    That is certainly part of the answer. The other part is that the banker doesn’t have an option to directly invest the funds. Banks are constrained in this regard. Money earmarked for lending cannot instead be invested by the bank.