4 ms·

> They simply can't do it and rather extrapolate current conditions to infinity. This is what I think more people should be paying attention to. I keep seeing

> They simply can't do it and rather extrapolate current conditions to infinity. This is what I think more people should be paying attention to. I keep seeing the FIRE(financially independent; retire early) people talk about the returns they have gotten the past 100 years, not taking into account that the first 50 of those years saw tremendous growth, and the last of those 50 years saw tremendous stagnation and debt that doesn't seem sustainable. The world's first billionaire was Rockefeller in the early 1900's. By 1970 the world's richest man was Hughes, who had amassed a fortune of $2.5 billion. In 70 years the number doubled. Since then in the next 50 years the world's richest man is now Musk, with a wealth 100x that of Hughes at $290 billion. In 1970 the minimum wage was $1.70 compared to today's $7.25, an increase of 4.2x. 100x vs 4.2x. When you extrapolate that growth out another 50 years, the world's richest man ends up at $25 trillion. Minimum wage would grow to $30/hour. Another 50 years further, $2.5 Quadrillion, minimum wage is now $125/hour. It's ludicrous. Have we been boiling frogs the past 50 years? If the wealthy at those price levels tried to sell even 1% of their wealth/year the system would crash. So it's clear from my standpoint that those growth levels will simply not happen. How does it break? Does it break with minimum wage growth? Does it break with everything going to 0? Something else happens? What happens when interest rates are unable to fall further? Are we already at the end of the ball? How much higher can it go?

ricardobeat 5y ago
The value of USD is not constant. Either you adjust the 1970 values to today’s dollar, giving you $17B for Hughes’ fortune, or you index the $100B by the minimum salary giving you 23B vs 2.5B, a less than 10x increase. Not unreasonable considering the global scale business can have today.
- strogonoff 5y ago
  Notably, when adjusted for inflation, the minimum wage in the US has actually dropped since 1970, at which point it was almost 9 in today’s USD.
kortilla 5y ago
I don’t understand the obsession with comparing the wealth of the furthest most point of the distribution tail to minimum wage, it makes absolutely no sense. Who cares how much Musk or Bezos have? Have the government seize literally everything from them and everyone in the US could have $1k once. Despite being at the top, their wealth is irrelevant on a societal scale.
phkahler 5y ago
>> What happens when interest rates are unable to fall further? We are there. QE is the next thing. I think they understand now that raising interest rate quickly will kill the housing market like in 2007. So they need inflation while slowly raising rates.
- bamboozled 5y ago
  Why is it that property / houses seem to end up so overvalued and then interest rates become such a crisis? It's weird to me that as a society, it's such a priority to borrow huge amount of money to buy property we cannot afford, then end up in this situation where the worst thing ever would be to put up the interest rates and force everyone to lose their shirt.
  - jbay808 5y ago
    The main reason for this is very simple. It's because housing is considered a "safe asset", and this means that lenders are willing to lend at low rates for housing purchases; they think that if you fail to pay, at least they'll get the house, and it's very unlikely to go down. This is why you can borrow money with a mortgage for 2~3%, while borrowing money to buy, say, food, costs 20%. It shouldn't be surprising that when the cost of debt is very low for a particular asset class, that asset class will end up more highly leveraged than others, and will be more sensitive than others to changes in the cost of borrowing. To make matters worse, the more that banks are willing to lend for house purchases, the more money they effectively add into the system, driving up the price of housing further, which also adds to the illusion that real estate only goes up... And, the perceived safety of this asset makes homebuyers more willing to spend a ton of money on a housing purchase. It's how the middle class is expected to save for their retirement, after all... Housing is also the main asset class that couples the financial world of the "asset economy" into the consumer world of the middle working class. While most people don't worry too much about the price of Amazon shares -- and if they want them, they'd be about as happy buying $1000 worth of shares whether that gets them one share or ten -- there's no ignoring the effect of real estate prices on families, peoples' lives, and savings. Governments care a lot about this and are unwilling to let the bubble pop. Finally, and perhaps most importantly, when central banks are worried about deflation and a slowdown in the economy, they react by reducing interest rates. The hope is that this increases consumer spending, by increasing confidence in borrowing (which increases real estate prices). One of the mechanisms for this is the "wealth effect"; if people feel richer (because their house is worth more on paper), they are willing to spend more, and this consumption drives the economy. It seems that since the mid '90s, western countries have been terrified of ending up in a deflationary spiral like Japan, and are pulling that lever again and again to try to stoke consumer confidence. However, it's quite possible that it's ineffective, and at any rate, it's going to be hard to push it further than it's at now.
andrewjl 5y ago
> What happens when interest rates are unable to fall further? Are we already at the end of the ball? How much higher can it go? One interesting option is different policy rates for different sectors of the economy. Last year during the COVID markets crisis the ECB used[1] this type of mechanism to keep a wide availability of credit. [1] https://www.ecb.europa.eu/mopo/implement/omo/tltro/html/index.en.html https://www.ecb.europa.eu/mopo/implement/omo/tltro/html/inde... > How do they work? The TLTROs are targeted operations, as the amount that banks can borrow is linked to their loans to non-financial corporations and households. In TLTRO III, similarly to TLTRO II, the interest rate to be applied is linked to the participating banks’ lending patterns. The more loans participating banks issue to non-financial corporations and households (except loans to households for house purchases), the more attractive the interest rate on their TLTRO III borrowings becomes.
grog454 5y ago
> Musk, with a wealth 100x that of Hughes at $290 billion I've never really understood this kind of net worth valuation. Since most of that value is tied up in Telsa stock, he's only worth that as long as he keeps doing what he's doing. In a way he's a slave to his net worth (not that I would mind being in his financial position). If, tomorrow, Elon throws his hands up and decides he's had enough and wants to exit his position, there would be significant downward pressure on TSLA price not just from his huge sell orders but from the panic of investors wondering why Elon is quitting. (Ex: TSLA was down 15.4% the week of his recent sale of $6.9B which was somewhere around 3% of his holdings). I'm also not sure how cap gains taxes are being factored in to, well, anyone's net worth calculation. A more meaningful measure of net worth is probably assets excluding stock in one's day job (or include the stock at a massive penalty depending on the dependency of the company on said person). Which would still probably be billions for Elon.
- ItsMonkk 5y ago
  This was a fair comparison - the same exact thing was true of Hughes and Rockefeller. But your argument is actually my argument. The past 50 years wealth inequality has grown, and we are now starting to see liquidity issues where for their particular stock. But if we let this trend continue, sometime in the next 100 years, if they intend to sell and use their wealth for some utility, it will have a either have a liquidity effect on the entire market, or/and have substantial wage inflation as a result.
  - grog454 5y ago
    >This was a fair comparison - the same exact thing was true of Hughes and Rockefeller. Agreed, but then Hughe's et al net worth are wrong imo as well. If you or I give a two week notice our net worth probably doesn't drop a cent. If some (but importantly not all) UHNW people quit on short notice their networth drops an order of magnitude or more. I presume it can be done with a very long term and carefully managed exit strategy, and I'll assume that's what bill gates did with nothing but the knowledge that he served as a board member long after stepping down as CEO. I suppose my only point is that these top N networth lists are irrelevant at best, and it would not surprise me if significant wealth utility is actually held by people with lower public visibility (inheritors, private company owners, private investors, dictators, etc).

ricardobeat 5y ago

The value of USD is not constant. Either you adjust the 1970 values to today’s dollar, giving you $17B for Hughes’ fortune, or you index the $100B by the minimum salary giving you 23B vs 2.5B, a less than 10x increase. Not unreasonable considering the global scale business can have today.

strogonoff 5y ago
Notably, when adjusted for inflation, the minimum wage in the US has actually dropped since 1970, at which point it was almost 9 in today’s USD.

kortilla 5y ago

I don’t understand the obsession with comparing the wealth of the furthest most point of the distribution tail to minimum wage, it makes absolutely no sense. Who cares how much Musk or Bezos have? Have the government seize literally everything from them and everyone in the US could have $1k once. Despite being at the top, their wealth is irrelevant on a societal scale.

phkahler 5y ago

>> What happens when interest rates are unable to fall further? We are there. QE is the next thing. I think they understand now that raising interest rate quickly will kill the housing market like in 2007. So they need inflation while slowly raising rates.

bamboozled 5y ago
Why is it that property / houses seem to end up so overvalued and then interest rates become such a crisis? It's weird to me that as a society, it's such a priority to borrow huge amount of money to buy property we cannot afford, then end up in this situation where the worst thing ever would be to put up the interest rates and force everyone to lose their shirt.
- jbay808 5y ago
  The main reason for this is very simple. It's because housing is considered a "safe asset", and this means that lenders are willing to lend at low rates for housing purchases; they think that if you fail to pay, at least they'll get the house, and it's very unlikely to go down. This is why you can borrow money with a mortgage for 2~3%, while borrowing money to buy, say, food, costs 20%. It shouldn't be surprising that when the cost of debt is very low for a particular asset class, that asset class will end up more highly leveraged than others, and will be more sensitive than others to changes in the cost of borrowing. To make matters worse, the more that banks are willing to lend for house purchases, the more money they effectively add into the system, driving up the price of housing further, which also adds to the illusion that real estate only goes up... And, the perceived safety of this asset makes homebuyers more willing to spend a ton of money on a housing purchase. It's how the middle class is expected to save for their retirement, after all... Housing is also the main asset class that couples the financial world of the "asset economy" into the consumer world of the middle working class. While most people don't worry too much about the price of Amazon shares -- and if they want them, they'd be about as happy buying $1000 worth of shares whether that gets them one share or ten -- there's no ignoring the effect of real estate prices on families, peoples' lives, and savings. Governments care a lot about this and are unwilling to let the bubble pop. Finally, and perhaps most importantly, when central banks are worried about deflation and a slowdown in the economy, they react by reducing interest rates. The hope is that this increases consumer spending, by increasing confidence in borrowing (which increases real estate prices). One of the mechanisms for this is the "wealth effect"; if people feel richer (because their house is worth more on paper), they are willing to spend more, and this consumption drives the economy. It seems that since the mid '90s, western countries have been terrified of ending up in a deflationary spiral like Japan, and are pulling that lever again and again to try to stoke consumer confidence. However, it's quite possible that it's ineffective, and at any rate, it's going to be hard to push it further than it's at now.

andrewjl 5y ago

> What happens when interest rates are unable to fall further? Are we already at the end of the ball? How much higher can it go? One interesting option is different policy rates for different sectors of the economy. Last year during the COVID markets crisis the ECB used[1] this type of mechanism to keep a wide availability of credit. [1] https://www.ecb.europa.eu/mopo/implement/omo/tltro/html/index.en.html https://www.ecb.europa.eu/mopo/implement/omo/tltro/html/inde... > How do they work? The TLTROs are targeted operations, as the amount that banks can borrow is linked to their loans to non-financial corporations and households. In TLTRO III, similarly to TLTRO II, the interest rate to be applied is linked to the participating banks’ lending patterns. The more loans participating banks issue to non-financial corporations and households (except loans to households for house purchases), the more attractive the interest rate on their TLTRO III borrowings becomes.

grog454 5y ago

> Musk, with a wealth 100x that of Hughes at $290 billion I've never really understood this kind of net worth valuation. Since most of that value is tied up in Telsa stock, he's only worth that as long as he keeps doing what he's doing. In a way he's a slave to his net worth (not that I would mind being in his financial position). If, tomorrow, Elon throws his hands up and decides he's had enough and wants to exit his position, there would be significant downward pressure on TSLA price not just from his huge sell orders but from the panic of investors wondering why Elon is quitting. (Ex: TSLA was down 15.4% the week of his recent sale of $6.9B which was somewhere around 3% of his holdings). I'm also not sure how cap gains taxes are being factored in to, well, anyone's net worth calculation. A more meaningful measure of net worth is probably assets excluding stock in one's day job (or include the stock at a massive penalty depending on the dependency of the company on said person). Which would still probably be billions for Elon.

ItsMonkk 5y ago
This was a fair comparison - the same exact thing was true of Hughes and Rockefeller. But your argument is actually my argument. The past 50 years wealth inequality has grown, and we are now starting to see liquidity issues where for their particular stock. But if we let this trend continue, sometime in the next 100 years, if they intend to sell and use their wealth for some utility, it will have a either have a liquidity effect on the entire market, or/and have substantial wage inflation as a result.
- grog454 5y ago
  >This was a fair comparison - the same exact thing was true of Hughes and Rockefeller. Agreed, but then Hughe's et al net worth are wrong imo as well. If you or I give a two week notice our net worth probably doesn't drop a cent. If some (but importantly not all) UHNW people quit on short notice their networth drops an order of magnitude or more. I presume it can be done with a very long term and carefully managed exit strategy, and I'll assume that's what bill gates did with nothing but the knowledge that he served as a board member long after stepping down as CEO. I suppose my only point is that these top N networth lists are irrelevant at best, and it would not surprise me if significant wealth utility is actually held by people with lower public visibility (inheritors, private company owners, private investors, dictators, etc).