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This is a topic I truly want to become more mainstream knowledge. Wealth inequality only decreases notably during market corrections, which the Fed is determine

This is a topic I truly want to become more mainstream knowledge. Wealth inequality only decreases notably during market corrections, which the Fed is determined to prevent at all costs [0]. The more the Fed distorts normal market signals, like interest rates, the less efficiently capital is allocated, and so the wealth distribution morphs from one that roughly represents human skill at allocating capital to an extremely top-heavy skewed chart that rewards incumbents. [0] https://fred.stlouisfed.org/series/WFRBST01134 https://fred.stlouisfed.org/series/WFRBST01134

HWR_14 4y ago
> the wealth distribution morphs from one that roughly represents human skill at allocating capital When has the been the case? I thought the case for index funds went something like "there is no replicatable skill test for assigning capital, so just diversify"
- whimsicalism 4y ago
  It's more like: if there was a replicable test for assigning capital, the pricing of that assignee/that capital would already reflect the results of that test.
whimsicalism 4y ago
I largely agree with many of the points you are making, but I feel like you are missing the obvious rejoinder anyone would make to your point: Why care about wealth inequality as a first-order concern? The periods you identify as decreasing wealth inequality also correspond to periods of decrease in real median income [0]. If my median income is going up, why should I root for periods that decrease it, even if it means that the wealthy are being hurt more than I am? Seems a bit like cutting off the nose to spite the face. [0] https://fred.stlouisfed.org/series/MEHOINUSA672N https://fred.stlouisfed.org/series/MEHOINUSA672N
- avgcorrection 4y ago
  That is not an obvious rejoinder that “anyone would make”.
  - whimsicalism 4y ago
    If you are arguing that recessions are actually good because they decrease wealth inequality, it seems like yeah - recessions being bad for most people would be an obvious rejoinder.
    - avgcorrection 4y ago
      Some people care about wealth inequality “as a first-order concern”. That is the point. So yours is not an “obvious rejoinder”. Do you understand now?
    - avgcorrection 4y ago
      I guess you don’t.
- lend000 4y ago
  I agree we can't just assume "wealth inequality" is inherently bad. That would imply that perfect wealth equality is the goal, which a number of communist and socialist government experiments have demonstrated to be a poor ideal in practice. My metric is that it should roughly match human skill at allocating capital / generating value in a free market. The closer we get to this metric, the bigger the overall pie should end up in the long run (and the better we can feel about people who have big pieces).
- Rury 4y ago
  >Why care about wealth inequality as a first-order concern? Because, markets behave in a zero sum manner when limiting constraints are reached (ie room for growth has run out), and many economies aren't really growing all that much right now. As a simple example, there is only so much land in Manhattan (all of which is already owned; some of which might be for sale). That means if you ever wish to own land in Manhattan and currently do not, you must take it from someone else who already owns land in Manhattan (making it their loss). This makes owning land in Manhattan a zero sum market. Granted you wouldn't take it in a literal sense, but trade for it. The point here is that you can't just magically make yourself some land in Manhattan. Rather you must trade for it, and beat competing offers from other market participants. Which brings me to my next point... >If my median income is going up, why should I root for periods that decrease it, even if it means that the wealthy are being hurt more than I am? In short, focusing solely on your own income is too short-sighted. As the price of everything is dictated by the collective market (ie other market participants who also have disposable income). If you don't acknowledge this, then there's potential for you to be priced out of markets even if your income is growing, but growing slower relative to everyone else. Hence, if your income falls, but at a slower pace than everyone else, you will be better off in markets, because effectively, your earnings will trade relatively for more despite your income having decreased.
usefulcat 4y ago
> The more the Fed distorts normal market signals, like interest rates, the less efficiently capital is allocated It seems like a 0% fed rate would corresond to a complete lack of 'distortion'--the effective rate is then 100% a 'market signal', no? I would think--at least according to this author's thesis--that a moderate level of fed 'distortion', in the form of a moderate-but-certainly-not-zero fed rate, would be desirable.
- pclmulqdq 4y ago
  A 0% rate distorts the market by giving out money for free in the form of loans. A 100% rate distorts the market by giving out money for free in the form of savings interest. Ideally, the fed funds rate is about equal to the inflation rate. Alternatively, there would be a "no distortion" policy if the rate for savings interest was 0% and the rate for loans was >100%.
  - imtringued 4y ago
    A 0% interest rate on debt is actually the ideal interest rate because it implies people save exactly as much as they invest. The reason why a 0% interest rate on cash distorts the market is that it is inherently a government subsidy when the economy is declining temporarily.
- heartbreak 4y ago
  Do you know what the Fed rate is for?
vmception 4y ago
> This is a topic I truly want to become more mainstream knowledge. Wealth inequality only decreases notably during market corrections, which the Fed is determined to prevent at all costs [0]. I don't think any action the fed takes can reduce wealth inequality because of the simple reality that there is a capital class, and a class without capital. Once one has capital, they can take any direction of the market in response to any market condition. It "reduces" only in the sense that asset values decline for passive holders, but its hardly a different reality for those with negative/zero/five-figure net worth and the whims of those with 7, 8, 9, 10, 11 figure net worth.
- DennisP 4y ago
  Sure, some assets do well when others do poorly. But labor is an asset too, and it's possible for labor to come out ahead when everything else is doing badly.
  - ThalesX 4y ago
    Capital owners would have to crash through a lot of safety nets to even get to the point where they would consider labor as a possible means to get ahead.
    - DennisP 4y ago
      No, what I mean is that capital owners can do badly while workers increase their income.
    - trgn 4y ago
      I think that's overextending the parent's point. Labor can certainly come out ahead. Market crashed (or at least tech did), and will likely continue to do so. If you're a rentier now, it doesn't mean you'll end up in the poor house, but you're certainly getting clobbered versus the sharp income increases skilled labor is seeing today. I think you'll see this inversion very concretely at the edges; the FIRE-crowd holding on to their jobs for longer would be an example (many of those find them starting from scratch now). Or those evil "capital owners", basically any 60+ white collar employee trying to retire now, they're terrified and will be holding on. Sometimes people get what they want; labor market is completely hot, and capital is down the drain. Seeing very little rejoicing though.
trgn 4y ago
> The more the Fed distorts normal market signals, I don't see at all how the Fed is manipulating market signals. Public companies are an open book. We know at all times what their financial fundamentals are. Fed does not manipulate this. Aggregate market sentiment develops in a thousand ways, the Fed really isn't puppeteering here. > market corrections [...] prevent at all cost. Fed-decision this week cascaded in the wiping out of trillions of equity. Can somebody please explain how they are propping up the capital class, or how they are preventing market corrections?
- darawk 4y ago
  The fed sets the risk free rate. The risk free rate is an input to many other capital allocation decisions across the economy. When the risk free rate is low, you can keep an unprofitable business spinning for far longer. When its higher, conditions are tighter, and you have to run a leaner business to survive. Consider the fed funds rate as the difficulty setting for business. Dialing it down is easy mode. Dialing it up is hard mode. When the difficulty gets dialed up, we inevitably discover that people that were believed to be smart businessmen and women were actually incompetent all along. > Fed-decision this week cascaded in the wiping out of trillions of equity. Can somebody please explain how they are propping up the capital class, or how they are preventing market corrections? Their decisions this week were to raise the rates, although they were actually a bit more dovish than expected, which is why the market rose on that day. The way people consider the fed to be propping up the market is that, in the recent past, the fed has responded to market corrections by lowering interest rates and/or increasing QE. Both of which serve to prop up asset prices. The behavior of the Fed at this very moment though is to raise rates, which is not propping up the market. The author of this post though is arguing that they should have raised rates even more, and the fact that they didn't is a gift to capital owners.
  - imtringued 4y ago
    Dialing the interest rate on cash into negative territory is impossible mode. Enjoy finding an endless number of excuses why yields should be positive for all eternity regardless of how the economy is performing.

HWR_14 4y ago

> the wealth distribution morphs from one that roughly represents human skill at allocating capital When has the been the case? I thought the case for index funds went something like "there is no replicatable skill test for assigning capital, so just diversify"

whimsicalism 4y ago
It's more like: if there was a replicable test for assigning capital, the pricing of that assignee/that capital would already reflect the results of that test.

whimsicalism 4y ago

I largely agree with many of the points you are making, but I feel like you are missing the obvious rejoinder anyone would make to your point: Why care about wealth inequality as a first-order concern? The periods you identify as decreasing wealth inequality also correspond to periods of decrease in real median income [0]. If my median income is going up, why should I root for periods that decrease it, even if it means that the wealthy are being hurt more than I am? Seems a bit like cutting off the nose to spite the face. [0] https://fred.stlouisfed.org/series/MEHOINUSA672N https://fred.stlouisfed.org/series/MEHOINUSA672N

avgcorrection 4y ago
That is not an obvious rejoinder that “anyone would make”.
- whimsicalism 4y ago
  If you are arguing that recessions are actually good because they decrease wealth inequality, it seems like yeah - recessions being bad for most people would be an obvious rejoinder.
  - avgcorrection 4y ago
    Some people care about wealth inequality “as a first-order concern”. That is the point. So yours is not an “obvious rejoinder”. Do you understand now?
  - avgcorrection 4y ago
    I guess you don’t.
lend000 4y ago
I agree we can't just assume "wealth inequality" is inherently bad. That would imply that perfect wealth equality is the goal, which a number of communist and socialist government experiments have demonstrated to be a poor ideal in practice. My metric is that it should roughly match human skill at allocating capital / generating value in a free market. The closer we get to this metric, the bigger the overall pie should end up in the long run (and the better we can feel about people who have big pieces).
Rury 4y ago
>Why care about wealth inequality as a first-order concern? Because, markets behave in a zero sum manner when limiting constraints are reached (ie room for growth has run out), and many economies aren't really growing all that much right now. As a simple example, there is only so much land in Manhattan (all of which is already owned; some of which might be for sale). That means if you ever wish to own land in Manhattan and currently do not, you must take it from someone else who already owns land in Manhattan (making it their loss). This makes owning land in Manhattan a zero sum market. Granted you wouldn't take it in a literal sense, but trade for it. The point here is that you can't just magically make yourself some land in Manhattan. Rather you must trade for it, and beat competing offers from other market participants. Which brings me to my next point... >If my median income is going up, why should I root for periods that decrease it, even if it means that the wealthy are being hurt more than I am? In short, focusing solely on your own income is too short-sighted. As the price of everything is dictated by the collective market (ie other market participants who also have disposable income). If you don't acknowledge this, then there's potential for you to be priced out of markets even if your income is growing, but growing slower relative to everyone else. Hence, if your income falls, but at a slower pace than everyone else, you will be better off in markets, because effectively, your earnings will trade relatively for more despite your income having decreased.

usefulcat 4y ago

> The more the Fed distorts normal market signals, like interest rates, the less efficiently capital is allocated It seems like a 0% fed rate would corresond to a complete lack of 'distortion'--the effective rate is then 100% a 'market signal', no? I would think--at least according to this author's thesis--that a moderate level of fed 'distortion', in the form of a moderate-but-certainly-not-zero fed rate, would be desirable.

pclmulqdq 4y ago
A 0% rate distorts the market by giving out money for free in the form of loans. A 100% rate distorts the market by giving out money for free in the form of savings interest. Ideally, the fed funds rate is about equal to the inflation rate. Alternatively, there would be a "no distortion" policy if the rate for savings interest was 0% and the rate for loans was >100%.
- imtringued 4y ago
  A 0% interest rate on debt is actually the ideal interest rate because it implies people save exactly as much as they invest. The reason why a 0% interest rate on cash distorts the market is that it is inherently a government subsidy when the economy is declining temporarily.
heartbreak 4y ago
Do you know what the Fed rate is for?

vmception 4y ago

> This is a topic I truly want to become more mainstream knowledge. Wealth inequality only decreases notably during market corrections, which the Fed is determined to prevent at all costs [0]. I don't think any action the fed takes can reduce wealth inequality because of the simple reality that there is a capital class, and a class without capital. Once one has capital, they can take any direction of the market in response to any market condition. It "reduces" only in the sense that asset values decline for passive holders, but its hardly a different reality for those with negative/zero/five-figure net worth and the whims of those with 7, 8, 9, 10, 11 figure net worth.

DennisP 4y ago
Sure, some assets do well when others do poorly. But labor is an asset too, and it's possible for labor to come out ahead when everything else is doing badly.
- ThalesX 4y ago
  Capital owners would have to crash through a lot of safety nets to even get to the point where they would consider labor as a possible means to get ahead.
  - DennisP 4y ago
    No, what I mean is that capital owners can do badly while workers increase their income.
  - trgn 4y ago
    I think that's overextending the parent's point. Labor can certainly come out ahead. Market crashed (or at least tech did), and will likely continue to do so. If you're a rentier now, it doesn't mean you'll end up in the poor house, but you're certainly getting clobbered versus the sharp income increases skilled labor is seeing today. I think you'll see this inversion very concretely at the edges; the FIRE-crowd holding on to their jobs for longer would be an example (many of those find them starting from scratch now). Or those evil "capital owners", basically any 60+ white collar employee trying to retire now, they're terrified and will be holding on. Sometimes people get what they want; labor market is completely hot, and capital is down the drain. Seeing very little rejoicing though.

trgn 4y ago

> The more the Fed distorts normal market signals, I don't see at all how the Fed is manipulating market signals. Public companies are an open book. We know at all times what their financial fundamentals are. Fed does not manipulate this. Aggregate market sentiment develops in a thousand ways, the Fed really isn't puppeteering here. > market corrections [...] prevent at all cost. Fed-decision this week cascaded in the wiping out of trillions of equity. Can somebody please explain how they are propping up the capital class, or how they are preventing market corrections?

darawk 4y ago
The fed sets the risk free rate. The risk free rate is an input to many other capital allocation decisions across the economy. When the risk free rate is low, you can keep an unprofitable business spinning for far longer. When its higher, conditions are tighter, and you have to run a leaner business to survive. Consider the fed funds rate as the difficulty setting for business. Dialing it down is easy mode. Dialing it up is hard mode. When the difficulty gets dialed up, we inevitably discover that people that were believed to be smart businessmen and women were actually incompetent all along. > Fed-decision this week cascaded in the wiping out of trillions of equity. Can somebody please explain how they are propping up the capital class, or how they are preventing market corrections? Their decisions this week were to raise the rates, although they were actually a bit more dovish than expected, which is why the market rose on that day. The way people consider the fed to be propping up the market is that, in the recent past, the fed has responded to market corrections by lowering interest rates and/or increasing QE. Both of which serve to prop up asset prices. The behavior of the Fed at this very moment though is to raise rates, which is not propping up the market. The author of this post though is arguing that they should have raised rates even more, and the fact that they didn't is a gift to capital owners.
- imtringued 4y ago
  Dialing the interest rate on cash into negative territory is impossible mode. Enjoy finding an endless number of excuses why yields should be positive for all eternity regardless of how the economy is performing.