Fun fact: the Cantillon effect, whereby the first recipients of newly created money (banks and financial institutions) gain at the expense of the later recipients due to being able to spend it first before it causes much inflation, can by itself produce a highly unequal distribution of wealth. So even if everything else in society was perfect, the current central banking system would still lead to an uneven distribution of wealth.
This would be remedied if newly created money was credited directly to people's accounts rather than given to banks to lend out.
>whereby the first recipients of newly created money (banks and financial institutions)
This is commonly misunderstood. Central banks create interbank money that cannot be spent outside the financial system. The banks themselves create the new money by issuing loans. However, they issue these loans to the already rich, thereby exacerbating existing inequality.
There's a crucial distinction here to make, you are naming the correct effect, and it has the correct effect, but it happens somewhere different, so your proposed solutions would be adverse.
> There's a crucial distinction here to make, you are naming the correct effect, and it has the correct effect, but it happens somewhere different, so your proposed solutions would be adverse.
Can you spell out the adverse effects you see in the proposal to credit money directly to people's accounts? It seems like the money people spend would go to paying directly for consumables and to paying off loans and the money they don't spend would stay in the banking system, helping to meet capital requirements and supporting the banks' loans to the rich (and others.) It seems like the above situation might create inflation in consumables but it wouldn't create asset price inflation. And since the money is going directly to those most affected by inflation in consumables, there's a different but reasonable balance achieved. So, I can see that you see something I don't see. Can you give some examples?
Bank loans (the money creation) largely flow to those with good credit - i.e. the upper and middle classes. They can use the extra credit to buy more assets like houses, or even take personal loans to 'yolo' into crypto to $TSLA.
The exceptional, pandemic-related stimulus money may have done something similar, but now I'm speculating. Of course, giving more money to people when consumables are inflating due to scarcity from a supply shock will only make the inflation worse, won't it? No matter whether you give money to wealthy people or everyone.
> They can use the extra credit to buy more assets like houses, or even take personal loans to 'yolo' into crypto to $TSLA.
I'd agree that this is the case and argue that it is what has been happening since the aftermath of the ~2008 GFC. I'd further argue that this is one of the chief drivers of inequality as it drives up the price of housing for everyone without driving up everyone's ability to pay for housing by the same degree. To my eye, that is an adverse consequence. That it also drives up stock prices is mainly of interest to the relative few in the economy who own stocks. That an increasing share of flat-ish income is spent on housing rather than on, e.g., food, is an adverse effect of the strategy.
You're moving the goalposts to raise supply shock scarcity rather than something inherent to money for everyone rather than money for the already monied. I do agree that supply shocks are probably a factor these days. That said, there's only so much a given population is able to consume and making sure that they all have an equal chance at it seems more pertinent to maintaining stability than increasing the price of assets, where there is no inherent limit.
I'd really like to understand this process. Is there a real world example of government employee adjusts a particular figure on a particular bit of software. That then somehow sends money to a particular bank?
2. How Do Primary Dealers Make Money?
Primary dealers buy bonds directly from the government and then resell them to clients and investors at a slight mark-up. This small difference in price is how primary dealers earn a profit. https://www.investopedia.com/terms/p/primarydealer.asp
Recommend picking up a copy of Central Banking 101[1] for a gentle introduction; the basic mechanics of fractional reserve banking are explained in Chapter 2.
This isn't even wrong. Newly created money isn't given to recipients. It's either borrowed by financial institutions, who must repay it with interest, or used to purchase government and agency bonds from private holders in the open market.
When a financial institution borrows from a central bank, the financial institution records an increase in financial obligations (a credit to Liabilities), along with a corresponding increase in cash & equivalents (a credit to Assets). All of this is in the bank's balance sheet, easily verifiable (e.g., by reading annual reports).
What you're suggesting (somehow getting central banks to lend newly created money to individuals even if they don't ask for it) makes no sense.
But it’s banks that create money, by crediting it to peoples’ accounts. When you get a loan from the bank they create the money by crediting your account.
It doesn't have to be that way. People could have accounts with the central bank and it could credit their accounts directly, and the banking regulator could mandate 100% reserve requirements so that banks themselves couldn't create more money.
Unless there's a limit on how much can be put into the central bank account this would have an extremely severe impact during a financial crisis.
The central bank account would be safer than government bonds, meaning in a flight to safety interest rates on government debt would rise as money drained to the safer central bank account. Exactly the opposite of what you want when you may need government to act urgently and expansively to solve whatever problem has occurred and likely only the elected government has the authority to solve that problem.
The central bank would have very low interest rates for deposits. It's not even a farfetched idea. Central bank digital currency is exactly this concept implemented in a general way
Interest rates have no bearing on the issue I raised. During a financial crisis (2008) people don't care about interest rates they care about the safety of their capital.
Well said. It's a distorted representation of value. The monetary system is not an even playing field, some people earn more money than others whilst providing less value; even negative value. Those who spend other people's money right out of a money printer don't hold onto it anywhere near as tightly as those who had to work hard to earn it from other people whom themselves also worked hard.
I think this is a confusing/misleading way to frame it.
Instead of saying:
> some people earn more money than others whilst providing less value; even negative value
It's more precise to say:
> some entities (people, companies, ...) give money to some people whilst those people provide less value than others
This turns the passive language (receiving) into active language (giving) which requires a subject. Now immediately a question appears: why would the subject do that if they receive comparably little value?
In other words, this doesn't really have to do much with the monetary system at all. The same would be true without any money.
The difference is that if somebody or an institution earned their money fair and square, then they are entitled to give it to anyone they want. The problem is that the monetary system itself creates the inequality via artificial means (which falls on the shoulders of taxpayers and citizens via inflation) which means that big institutions did not earn much of the money that they're giving out; it was handed out to them through money printing. It's a systemic issue.
Just to be clear, I'm not disagreeing with the point you are making now, but it's clearly different from your original post which was all about "creating value".
Even without externalities there is plenty of work that isa net negative in the macroeconomic sense.
If I pay someone to espouse the glories of ignorance, sow division and shill terrible policy online (not that many among us don't do it for free regardless) that work is of negative value to the broader economy despite having scant if any externality. But, that work is of positive value in the microeconomic sense hence why someone would get paid to do it. There are lots of niches like this in the economy.
See related: Broken windows fallacy and bullshit jobs.
If you add to this that the value of "money" is backed by violence and you see that without energy to back that violence there can be no markets; then you will be able to imagine where this is heading at very fast velocity!
Nature does not negotiate.
- Own you time! Don't sell your time.
- Sell your past, not your present/future.
- Only work with software. Hardware is done permanently.
- Lower the energy requirements until it hurts.
- Make permanent solutions.
- Stop moving faster than 20 km/h, if you do take a train.
- Live small, so you can heat it for less.
- If you are in debt: SELL!
And it's clear through this lens that if the Fed's goal was actually to have a stable currency, they would grow the money supply through this method. Under a helicopter money scenario, the intended inflation/counter-deflation would happen nearly instantly, they could get the exact amount required, and we would move on with our lives.
Right now we have lagging indicators for lagging indicators that are lagged through the Cantillion effect. Of course it's an absolute impossibility to get it correct! No wonder we get booms and busts!
Deflation is bad, it causes rent-seeking through hoarding money. But inflation is bad, it causes rent-seeking through hoarding assets. The goal needs to be against rent-seeking, against zero sum behavior. The only way to accomplish that is steady prices.
How is the cantillon effect supposed to cause an exponentially and constantly increasing inequality? If I take you at your word inequality would be constant and never increase.
Also, proponents of the cantillon effect forget that people with money can do an inverse cantillon effect by withholding their money from the markets and then they can do a regular cantillon effect by putting their money on the market.
If we assume a positive return on capital aka a positive interest rate then inequality would rise simply because the wealthy have most of their consumption needs fulfilled already and then in the late stages of capitalism they would be the ones manipulating the cantillon effect because they act as a quasi central bank.
There are two competing hypotheses: (a) deposits/savings create loans; (b) loans create deposits. (a) is false. Private banks create more money than central banks through loans, so your solution won't work for that side.
The Cantillon effect is a desirable result in theory because it can greatly increases the viscosity of the resultant inflation. This gives the economy time to adapt to the change in prices. Depositing newly created money directly into people’s accounts has the same base problem as the current situation — it is misallocated with respect to the need for expanding currency supply — but has the added problem that inflating the currency this way has very low viscosity, which is undesirable. Very liquid inflation is correlated with poor outcomes historically.
Any practical allocation of new currency is going to be a misallocation, including a helicopter drop. The challenge governments have is inflating currency in a way such that it takes as long as possible to be fully reflected in the economy so that it is minimally disruptive. This turns out to be very tricky, precisely because it is virtually guaranteed to be a misallocation.
>The Cantillon effect is a desirable result in theory because it can greatly increases the viscosity of the resultant inflation
Whether it's desirable in theory depends on what the end goal is. If the end goal is less wealth inequality, a less efficient but more fair system might be more desirable than a more efficient one that systematically transfers wealth from currency holders to financial institutions.
Inequality is actually highly inefficient because inequality allocates production away from the poor who have human basic needs and toward the rich who basically only have superfluous consumption left. You can't argue that these rich people invest in better things than feeding children or educating them.
It is very rare for someone to have a sound argument from first principles as to why inequality is worse than equality for society as a whole. The majority don't get past "well, it's wrong because people kept saying so since I was young, duh!" to consider the pros and cons of inequality as opposed to equality (either as abstract ideals, or actualized realities) for society as whole.
Because it's self evident. Historically extreme inequality generally led to social and economic instability (e.g. the collapse of the Roman republic, French/Russian revolutions/what is happening now) and to misallocation of resources and other suboptimal outcomes.
Obviously aiming for absolute equality would probably be more harmful. But there are plenty of arguments on why excessively high inequality is bad for the society as a whole. If you never bothered to read them and resort to silly conjectures like: "well, it's wrong because people kept saying so since I was young, duh!". Well...
It's not self-evident, as there are plenty of counter-arguments, including the Chinese Empire, the Egyptian Empire, the British Empire, the Caste System in India (going strong for over 3 millennia), and so on. Most of human history has been a period of extreme inequality. All you've got is a handful of revolutions in the last 500 years?
You actually need to make a moral argument. For example, slavery is bad not because it caused the the Civil War, but because it's morally wrong (and there's plenty of arguments here). I've also yet to see a very crystalized train of thought as to why inequality (maybe even extreme inequality) is morally wrong.
Assume civilization has the perfect capacity and amount of resources to meet the basic needs (however that's defined) of all people.
Inequality here might be worse than a different civilization where we are in extreme abundance.
If one person has 99% of wealth and everyone else shares 1% - but that is still enough for everyone to have a good life - then it probably matters much less than the same amount of inequality when there's just enough resources.
So I think the amount of resources and the level of inequality matter - not just inequality in general.
Additionally, it matters what the people with most of the wealth are doing. If they're spending it mostly on orgies - that's probably not great. If they're spending it on making advances that we wouldn't otherwise invest in if things were equal - then I'd argue that's good.
All of this is going to be highly subjective based on what you think is basic needs and a good life and how much envy you have.
> So I think the amount of resources and the level of inequality matter - not just inequality in general.
Yep, I think I agree with this, although I've often seen stuff like "Elon Musk/Jeff Bezos/Mark Zuckerberg shouldn't have that much money. No one should."
So I think the typical anti-inequality argument has a much stronger conclusion.
Isn't moral argumentation subjective though and based on the moral premises an audience is willing to accept? How can one make a crystalized train of thought that withstands the subjective nature of all audiences, when the spectrum of humanity ranges from billionaires and cannibals to popes and middle school teachers?
Or perhaps I'm incorrectly inferring from your use of the word "crystalized" that you're looking for near undefeatable resiliency.
> including the Chinese Empire, the Egyptian Empire, the British Empire, the Caste System in India
Yes. All of those were indeed miserable places to be if you were poor or did not have right skin color etc. I agree.
> You actually need to make a moral argument. For example, slavery is bad not because it caused the the Civil War, but because it's morally wrong (and there's plenty of arguments here)
No necessarily. I'd prefer to make an utilitarian argument. Over long periods of time high inequality leads to inefficiency due to wealth accumulation across different generations.
I could try and make more arguments, but I'll let you have a go this time..
Here's a simple model: people have a desirable quality that exists in some people and doesn't in others. This quality is randomly distributed among all people. To express the quality, a person must have access to some amount (K) of resources. How do we maximize the expression of this quality? We maximize the number of people with K or more resources. Assuming some power-lawish distribution of resources what coefficient of that curve accomplishes this? The answer is the flattest one, assuming the total amount of resources exceeds K*population.
This model is communicated at large in various forms, "meritocracy", "you can do anything if you put your mind to it", "inalienable rights of life, liberty and the pursuit of happiness", "every life is sacred" and so on. It's such a common model, it seems unsurprising that many people balk at a need for explanation. It's like asking 'explain from first principles why 2+2=4'.
If the amount of resources is below Kpopulation - e.g. K/2population, wouldn’t that model suggest allocation K to half the population and 0 to the other half? If it is significantly above - e.g. 2Kpopulation, what’s the issue with giving everyone K and e.g. one person all the remaining resources?
I agree the model quality expression model suggests both those resource distribution models would be maximal. My supposition though is resource distribution is going to be power-law-ish, which it doesn't have to be restricted like that, but seems a natural expectation.
And yes when the available resources are below the saturation point, more analysis will be necessary to determine what's optimal. A more advanced model would account for a variety of qualities, each with different importance and different Ks, suggest distributions for those and relate them to total available resources. My intuition, based on 'lots of distributions end up being gaussian' is that equality is maximal except when significantly resource constrained (ie some state like war or famine), or k for some particularly important quality is extremely high (which interestingly is another common narrative: Noah's Ark, the Manhattan Project, Armageddon, The Martian.)
Could you or someone elaborate on that? It’s not obvious to me how uncertainty around K implies that equality is a good thing… it feels like there is some (perhaps obviously correct) assumption here on the distribution of K that’s missing here.
Now if we say that utility provided to society by a person is concave with respect to their resources, then equality becomes obvious, but that seems different than this toy model (and also not obviously correct).
Some inequality in wealth is ok and healthy: it allows to concentrate capital and build big things that a co-op usually cannot build.
Extreme inequality is dangerous because the few wealthiest people concentrate enough power to overpower the mechanisms that keep the society stable and working. If you can bribe your way out of problems with law, or force the hand of the government by lobbying or menacing, you can break the society, while also acquiring even more wealth. If not stopped, the process leads to a dictatorship at the mildest, or a downfall at the most extreme.
> It is very rare for someone to have a sound argument from first principles as to why inequality is worse than equality for society as a whole.
Rare to find sound argument does not equal absence of argument.
I’m not sure what a first principles case would be here, but I guess it would need to start with an agreement about what a person is and what a society is, and the interaction between those two. Difficult as these are not agreed upon, even in the west.
On a relatively orthodox view on these points, your argument might be that beyond a given level of inequality, there are diminishing marginal returns to even the beneficiaries of the inequality. Tinbergen, a relatively well-known economist, thought this was around 5x disparity in income (ignore assets). You might argue about the precise figure, but having lived in places where there is high inequality, the crime rate put a serious cap on my perceived quality of life.
If you want it in a less abstract sense, in this case it's essentially a kind of theft. A slow, steady transfer of wealth from currency holders to large financial institutions. Much as how counterfeiting is theft. Now people can argue it's okay to give the government the moral right to counterfeit for the greater good, but it's harder to make the argument that the financial industry should also be given that right.
Optimal inequality has a limit but people advocating for inequality don't think there is any limit. A single person owning everything due to a gene that increases economic performance by 0.01% above all other humans would be fair game.
I'm not entirely certain what the conclusion of the essay is, ultimately. It argues that central banks have been reducing the "neutral" rate over time, and lowered interest rates indicate an economy that needs to induce demand. it argues that an aging population demands less. It also argues that income inequality contributes to reduced demand. These are things I understand.
But it just ends in arguing that choices can be made about income inequality and "Let's get to work". What is the work, precisely? [Asking genuinely. I'm not a wealthy person who can buy a politician or give poison money to an academic institution to teach my philosophy. I don't know what the essay wants from me.]
> But it just ends in arguing that choices can be made about income inequality and “Let’s get to work”. What is the work, precisely?
The clear implication is “policies that address inequality.”
(Unfortunately, the only example the article gives is the wartime mobilization [0] that corresponded with the end of the Great Depression, which implies that the solution is to mobilize and launch a massive global conventional war, which seems both impractical and likely to have undesirable direct and indirect effects that would outweigh any salutary effects on the domestic distribution of income and wealth.)
[0] And unfortunately fails to point to a variety of anti-inequality domestic economic policies that were adopted within the US under the political cover of the war, which would–though definitely controversial–be a much more interesting discussion point than “wartime mobilization”.
I have no idea how to accomplish this in our current political structures, but the way cultures have historically solved this is through periodic debt forgiveness.
(Every 7 years in the Torah, Babylon did it at the discretion of the king, etc.)
Debt forgiveness can help reduce inequality, but so can holding people to their debt obligations. And either can also increase inequality. It entirely depends on the circumstances surrounding the debt.
It is true that many historical cultures have had a traditiom of periodic or irregular debt forgiveness. I think it is far less clear that the effect of such traditions was to constrain inequalities of wealth or income, or even that, lacking the ability for a narrow elite to organize extractive systems at the scale possible in the modern world, historical societies even had anything meaningfully comparable to modern problems in that domain to address.
There wasn't much economic growth at the time so paying interest was pretty much a literal debt trap. Forgiving debts definitively helped with poverty back then.
> anti-inequality domestic economic policies that were adopted within the US under the political cover of the war
Care to speak a little more about those? My impression was that FDR's focus shifted drastically away from New Deal policy-making upon the US's entry into the combat.
Okay, but this whole essay is just a well-argued, well research personal opinion. That's kind of what an essay is. I'd like to know what I'm supposed to do with it.
Under free market banking, interest rates (aka the price of money) are set by Supply & Demand. Central banks like to think they are not subject to S&D, which is why they make bad decisions about interest rates.
The interest rate would be set by how many people want to borrow money (buy) and how many people want to lend (sell). The convergence point would be the price of money aka interest rate.
Because it is not realistic. In every nation that has ever existed, the supplier of money has always been a monopolist. And this is precisely because the supplier has requested taxes to be paid in that currency that they supply. If you have multiple suppliers of money, then you literally destroy the entire basis of the state. The whole thing comes crashing down.
> era of free banking in the US, banks issued their own currency
The free banking era illustrates the problem. Rates are endogenous to the money supply. That circularity promotes a hyper-volatile credit cycle. There is no natural counter-balance we’ve discovered to that tendency. (Apart from ruinous boom-and-bust cycles.)
> They still issued USD, which was the only legal currency.
As I recall, they issued the paper version of stablecoins: they were denominated in units of US dollars, but they weren’t government money, and they traded at floating values, typically (aside from many other factors influencing value) declining in value with distance from the issuing bank.
The discount on the notes was inevitably related to the probability that the issuing bank would honor the notes and redeem them with gold.
When the Fed lost all credibility with exchanging their banknotes for gold, we had the Great Depression. FDR then defaulted on the gold bonds, basically stealing from the good citizens who had trusted the government.
I mean exactly that. They issued banknotes (that's why paper money is sometimes called banknotes). The banknotes were denoted in dollars, like bank checks today.
The money supply is endogenous, that is, the people demanding money via loans are the ones that create their own money. The supply of money is effectively infinite and only limited by regulations, the banks risk assessment of the borrower and the profitability of the business Vs the interest rate.
So there is no market for the interest rate of money that can be created.
If you have a fixed money supply then the interest rate isn't set by supply and demand of funds either but by liquidity preference. As the interest rate falls below liquidity preference people will simply hold cash or keep their money in checking accounts. The interest available for borrowing does not fall all the way to zero. It gets stuck at some positive value. This money is "saved" in the sense of deferred spending but it is not "saved" in the sense that it is not lent out and only available in the future once the loan is repaid, no, it is available today to spend.
The difference between classical and Keynesian economics is effectively that in the former you only have saving and consumption but in Keynesian economics you also have a third state "cash" (including bank account deposits) that is a hybrid of the two. It is neither consumption nor classical saving and this is what's the setting of the interest rate in the open market.
Dieter Suhr effectively argues that this liquidity premium is the effect of money being a social network. Just like Facebook extracting profits from your data, people with cash/deposits benefit from the network effects of money and can sell these network effects for money keeping the interest rate high and if they can't sell them they will try to benefit from them directly (e.g. speculation) as that is more profitable than lending money. Businesses and consumers are the ones creating the network effect so they should be compensated and not the idle who do nothing with their money.
The poster is alluding to the fact that an authority such as the Feds have the inclination to change this convergence point (for whatever reason). Therefore, this breaks the assumption that the money market is free.
I interpret that statement as, interest rates are set by demand for money relative to its supply. Doesn't particularly matter exactly what the supply mechanism is, just the level of demand relative to what's available.
There is no such thing as free market banking. Prior to 1913, the money supply was fixed to gold. Therefore, the supply was limited based on the amount of gold reserves held by the bank. This is an artificial constraint on supply, not a free market system.
Oh, it's every bit a free market system. The banks all issue their own currencies. All the government did was equate the dollar to so many oz of gold. The government did not fix the supply of gold. Only the exchange rate.
The supply of gold varied, by quite a bit. See the various gold rushes and the resulting inflation/deflation.
I definitely have no idea what "free market banking" is. Though, I think your statement is contradictory. Central banks control their money supply, and thus they are in direct control of the S in S&D. So I am not sure what it means to say that they don't think interest rates are subject to S&D.
I am quite certain they have an accurate high level understanding of the relationship between their supply, interest rates and inflation.
I would also like to point out that there are different types of interest rates. I am not sure what rates you suggest would be set by S&D.
>I definitely have no idea what "free market banking" is. Though, I think your statement is contradictory. Central banks control their money supply, and thus they are in direct control of the S in S&D.
Free market banking is banking in which any bank can issue money. The "supply" they were referring to is supply in the economic sense of supply and demand, i.e. the equilibrium market price of money/debt that would arise from the supply and demand of market participants.
If one farm had a legal monopoly on selling apples, them yes technically they are "supplying" them, but the price is not what the natural price of apples would be in a competitive market absent any legislatively granted monopolies.
In the modern system S&D is controlled by commercial banks and regulated by the central bank via the central bank rate.
Any bank could go rogue and lend money below central bank/base rate, but because all other banks can "earn" free money at the central bank at base rate this opportunity would instantly be arbitraged away.
Likewise market forces for borrowing are determined by the risk premium on top of base rate, with competition for borrowers arbitraging away opportunities for risk takers (lenders).
Well, being subject to S&D of money is why they have the mandate to keep inflation at 2%, no? You can argue that measuring inflation is a poor way, but you'd have to come up with a better alternative.
Yes, that is true, but it is still part of their mandate. Supply and demand of money gets reflected in inflation and the Fed responds by changing interest rates. Isn't this a free market mechanism?
No. In Friedman's "Monetary History of the United States" he shows how the Fed setting interest rates was rather erratic and much more unstable than the earlier free market mechanism. The Fed would guess at what the S+D point was, since the Fed was not subject to market forces. This meant they were always late and always wrong.
I meant they control the interest rates, which do not control inflation. Inflation comes about from the creation of money, which the central bank does to fund the government deficits.
> The ultra-rich therefore spend relatively small shares of their income on goods and services that directly provide jobs and incomes to others, instead accumulating stocks, bonds, art, trophy real estate, and other assets.
Investing in stocks does provide jobs and income to others. When you buy stocks, the money goes to finance the business.
When you buy art, the money goes to the artist.
And so on.
Consider if an artists creates a painting, and sells it to a rich dude for $100,000. Who is harmed by this? I don't understand all the "inequality is bad" axioms that people seem to accept uncritically.
The problem with purchasing assets in an environment like this is that you are transferring money from one cash hoarder to another. The velocity of money is low.
In the stock example, companies are also wealthy entities that hold cash when interest rates are cheap. For example, in 2017 (when rate targets were just above 0%) Apple had hundreds of billions in cash in Ireland and other tax haven nations. When Abenomics began in Japan and the Bank of Japan introduced zero interest rates and quantitative easing and yield curve control, one of the first things that happened was that companies started building huge money stores. When inflation remains stubbornly low, there isn't a strong need to get rid of your cash because it isn't losing a lot of value and you take little risk. You may as well hold on to it.
You're right that these economic activities are better than nothing but they aren't the kinds of activities that puts a generation of people to work and start building the kind of wealth that supports a family.
You could imagine that a cash hoard is passed around rich people, but there's going to be someone in the chain who is going to spend it on something other than art. Because rich people simply do not hoard cash. They do not have Scrooge McDuck cash vaults.
> companies started building huge money stores.
They don't have Scrooge McDuck cash vaults, either. Their money "store" is all invested.
> You may as well hold on to it.
Even if the money is deposited in a bank, it doesn't stay in the bank. The bank loans it out. That's how banks make money. You deposit money, they loan it out to someone who pays them interest.
> Even if the money is deposited in a bank, it doesn't stay in the bank. The bank loans it out. That's how banks make money. You deposit money, they loan it out to someone who pays them interest.
Not really, they'd rather buy treasuries and deposit at the FED for a risk-free 4-5% return and it shows in FRED data; roughly $2.5 Trillion dollars are currently held at just Fed's overnight repo facility. In return when banks do want to lend it out, poor people (often with bad or average credit) get ludicrous interest rates like 15-25%.
70% of the money supply in Germany is literally sitting in checking accounts. If people actually saved money by lending it via certificate of deposits according to classical economics then this number would be much lower.
>They don't have Scrooge McDuck cash vaults, either. Their money "store" is all invested.
The parent said cash hoarder to cash hoarder and that is true when you buy stocks or art and neither consume the newly obtained money nor lend it out.
>Even if the money is deposited in a bank, it doesn't stay in the bank. The bank loans it out. That's how banks make money. You deposit money, they loan it out to someone who pays them interest.
As I said above, the money isn't lent out, new money is created with loans and the money that is being created is also kept in checking accounts so nobody is bringing their money to the bank in the way you imply. Money in checking accounts is essentially dead money. It is like the money in Scrooge McDuck's vault.
Right so continue the money cycle. Lets say you take out a loan from the bank. There’s a low interest rate but it’s not zero so you better do something with it because you’ll have to pay the bank back. Maybe you could start a business making widgets but that’s really risky. It would be smarter to buy an appreciating asset like some real estate or maybe a share in a company. And hey a lot of people are buying assets so you know that as long as rates stay low someone else can borrow money to buy it off you at a higher price and you can pay the bank back and pocket some money. Or worst case someone with money saved might take it off your hands. Thats fine but we didn’t actually provide a good or service to the economy! All that’s happening is money is just wizzing around in equities markets inflating asset prices at best or creating dangerous bubbles at worst.
If neutral rates were higher then people with cash who want to invest would be more incentivized to buy a bond instead of a stock. But because the rate is higher the issuing company has to make at least that percentage to break even let alone make a profit. So they will need to make more widgets, which means they have to hire more people.
The down side of course is that rates are so high that companies can’t make enough money to pay back debt holders so they default and fail and have to fire everyone.
> When you buy stocks, the money goes to finance the business.
Only if you’re buying directly from the business, which you’re usually not. Usually you’re just buying from another shareholder (could be another individual, a mutual fund, a hedge fund, whatever).
The proceeds may indeed end up filtering into the rest of the economy (I may sell you the stock to pay my mortgage, the hedge fund pays their traders), but the money doesn’t fund the business of the traded company.
If you cannot sell your founders shares, they're worthless. Companies issue more stock to sell and raise capital all the time.
> the money doesn’t fund the business of the traded company.
Not directly, but indirectly it does. It makes the stocks valuable so the company can create shares and people will buy them. You know, like those stock options employees get.
> Companies issue more stock to sell and raise capital all the time.
Sure, but that’s still a small fraction of most trades most of the time. When companies sell stock (long after their IPO) the sales kind of have to be dripped out as a small percentage of the trading volume of the stock or it would negatively affect the price (more than considered acceptable). If a company or its insiders are most of the sellers by volume (again, if a company has been public a while), that’s a bad sign for the company.
> Not directly, but indirectly it does.
Also yes, but I would quibble that this is moving the goal posts from your original statement :). “The money goes to finance the business” seemed like a pretty direct declarative statement that didn’t touch on the nuance of “buying stock -> pushes price up -> makes debt cheaper for company/makes further stock sales attractive”.
I get the point you’re making and don’t entirely disagree. But in a proud HN tradition it read as a confident and straightforward declaration that describes the (IMHO) minority case, but not the more common case and sweeps important nuance aside.
Please don’t take that to mean I thought your thoughts or understanding were also lacking in nuance, I didn’t. But I figure there will always be people coming through these threads who don’t know the nuance, they’ll read the highly upvoted top comments and move on, thinking they’ve improved their understanding, and they will be led astray, so I was responding to the words as-written.
In my defense, none of this can be explained in a short paragraph. And if I wrote a long treatise on it, nobody would read it! People read short things. So I stick to the Newtonian Mechanics explanation rather than the Einsteinian/QM explanation.
BTW, understanding how and why free markets work is not very intuitive. It took a long time for me to understand it, and long conversations with my dad who had a PhD in economics. About 98% of what lay people implicitly believe about economics is intuitively obvious, but quite wrong.
The old hoary "rich people hoard money" is one of those tropes.
> Investing in stocks does provide jobs and income to others. When you buy stocks, the money goes to finance the business.
could somebody expand on this please? as far as I understood it, companies like Apple don’t issue shares very often. How does the share price going up go to their business unless they issue more shares (diluting existing shareholders)?
I don't know what Apple does. Of course, Apple could buy it on the market and hand it to people to exercise their options. But the usual thing is the company creates the stock and hands it out.
Most assets, both stocks and fine art, are bought and sold between relatively rich people not from the person or company who originally issued the asset.
Consider a house, the builder sells it once, but it gets bought and sold on average every 7 years subsequently.
When houses are sold, realtors get a percentage of the gross sale price (not just the gain), staging companies are brought in, painters and handymen are hired, and title companies, mortgage lenders, and assessors all get work. The local government also gets paid, in the form of transfer taxes.
These don't apply to all big ticket items, but since you mentioned houses, I thought I'd flesh out the picture on who benefits from buying/selling activity.
It's worth noting that all of these people get paid, regardless of whether the home seller made money or lost money on the home (or how much). So in a strong market, they will get a small share of the gains. But in a down market, the seller may make nothing, while these service providers all get paid.
Let's say Richie Rich buys a painting from Willy Wealthy for $100,000. Now Willy has an extra $100,000. What's he going to do with it?
There's an entire industry of artists making art to sell to the Richie Riches and Willy Wealthies of the world, and this has been going on since antiquity. Why do you think all that medieval Italian art was created? It was rich Italians patronizing the artists.
The same with real estate. In the meantime, while someone owns a house, they gotta pay others for insurance, repairs, maintenance, taxes, etc. Even buying the house will cost you 6% going to the starving real estate agent. Owning a house is very expensive, not counting the purchase price.
The money does flow back into the economy, but it's extremely diluted in that the surplus obtained by any individual "downstream" of great wealth is small.
Meanwhile, the people spending all that money are the same people setting things up to ensure that surplus flows back to... themselves. So the wealthy people spend money, the people who manufacture their stuff and provide their services get as little surplus as possible without inciting them to riot, and the remainder goes right back to some other wealthy person, and then the process repeats.
There's no guarantee that surplus/welfare/utility flows along with the money, and it should be obvious to any observer that it definitely does not in practice.
The tired old argument that wealth accumulation doesn't really exist because the money all eventually goes "back into the economy" has always been an insulting hand-wave that is neither a principled model nor in agreement with basic facts about the economy.
What is missing from your comment is the wealthy get that way by creating wealth, not by taking it from others. (This is why the economy grows - wealth creation.)
The government, on the other hand, gets money by taking it.
> What is missing from your comment is the wealthy get that way by creating wealth, not by taking it from others. (This is why the economy grows - wealth creation.)
Wealthy people accumulate wealth by many means. Creating wealth is only one of those means. Nor is wealth creation incompatible with the model I described.
> The government, on the other hand, gets money by taking it.
Who said anything about the government?
But if you want to argue that point, the government may create wealth just like any private individual or enterprise. In fact, it does create quite a lot of wealth, in the form of public services and overcoming various incentive problems of private industry operating in free markets.
Of course, governments do levy taxes in order to fund their activities. But you can't seriously argue that tax revenue is "taken" from the economy and also argue that wealth accumulation does not exist because wealthy individuals' money is not "taken" from the economy.
> What is missing from your comment is the wealthy get that way by creating wealth, not by taking it from others.
Its missing, because it is mostly not true.
The wealthy predominantly get wealthy by getting other people to create wealth, and taking it from them via contracts relying on imbalances of power and econonic coercion (in a fairly benign modern capitalist system; is less benign, less modern, emerging (or pre-) capitalist systems, the coercion is often jist direct threat or application of force rather than the economic coercion of the inherent precariousness of the working class in capitalist society.
Well, that's definitely the Marxist point of view of things.
Everybody in a business is creating the wealth of the business, and they get their share of the created wealth in the form of pay and benefits. Unsurprisingly, their compensation is in proportion to the value they add (i.e. the wealth their contributions create).
It is not a system based on forcing anyone. The cooperation is voluntary, with their compensation set by supply+demand.
> Everybody in a business is creating the wealth of the business
That's clearly not true. It's just ussually very hard to quantify how much wealth every individual is creating and it becomes even harder as you go up the chain of hierarchy.
> Unsurprisingly, their compensation is in proportion to the value they add
Well... that's a strong statement and generally incorrect, at best their compensation if bounded by the value they add (not that it's easy to measure in most roles). Supply+demand (as you said) is what determines compensation in 95%+ of all cases.
The job of a cost accountant is to quantify these things. If the business gets it wrong, then the business does poorly or even goes out of business.
Supply+Demand certainly does determine employee compensation. But consider that there is no demand for workers who would cost more than the value they add. If the worker was producing far more value than he was paid, then the worker will be enticed away by some other business offering him more money.
So, you can see how S+D nudges employee compensation towards being paid according to what value they produce.
> But consider that there is no demand for workers who would cost more than the value they add
In general yes. But as as some of the venture capital funded growth companies have shown us in recent years these values can stay detached for quite a while.
But yeah over longterm I'd you to be mostly right.
Let's look at the top 0.1%. An Amazon Senior SWE makes 1% and minimum wage in CA is 0.1% of the $35,000,000 per year that someone in the top 0.01% makes.
1/100 and 1/1000 is different, but the difference isn't that big.
Your overall point didn't make any sense though. "Lots of people don't earn minimum wage" doesn't mean that there isn't any power balance.
A senior engineer can be worth a lot more than $35M. Even just shaving 1% off the time that the server software consumes are worth many millions of dollars to the server company. The server companies compete for those people, so they get paid lots of money.
There is no power imbalance. If a worker produces a lot more value than he costs, he simply goes to another company that bids higher for him.
I'm sure just on this thread you'll find a ton of engineers who have saved their company millions of dollars, but they're still paid the generic wage everyone else is.
I’m not claiming market forces don’t exist. I’m just stating that earning wages is a completely different mindset than “some profit” vs “some more profit”.
People who don’t work for minimum wage are still facing the same basic constraint.
When you buy Microsoft stock, no money goes to Microsoft. Microsoft only raise capital when they issue new shares or sell reserved shares themselves. Stock markets are a secondary market.
I'm not sure what "axioms" you're referring to, but "inequality" is usually not considered bad.
What is more often considered bad is "inequity", which is what prevents a lot of people from earning a good, decent life. Some people work very hard in life and don't make any major bad decisions, and still have a hard life. Other people work little and have a good life. There's both inequality and inequity in this picture, but they're not the same thing.
What people object to is not mere inequality: inequality is expected to exist anywhere money exists. What people object to is "excessive inequality", or distributions of wealth where the Pareto coefficient is "too extreme". The reason why this is bad is because it effectively makes the "American dream" impossible for nearly everyone, in the extreme case.
Rich people don't predominately buy art from artists (for $100,000). They spend $100,000 on art from some art dealer, or other rich people; who paid $80,000 for it from someone else; that someone else paid $60,000 for it; and twenty steps down the line is either an actual artist who made pennies, or the artist is dead and no one involved had anything to do with its creation.
This is a similar phenomena as the stock market. "Why does the stock market exist" is an interesting question. The textbook answer would be: it allows companies to sell pieces of themselves to the public in order to raise capital. The caveat to this answer is, 99.99...9% of transactions on the stock market every day do not land money back in the company's checking account; the money lands with the person who owned the stock previously. Because of Federal Reserve Guaranteed Inflation, that person probably, usually, over long enough periods of time, paid less for it than the current buyer, and five million exchanges down the chain for this physical stock certificate is the company, during their IPO (or when they release more stock), who made just a bit of money.
There's nothing intrinsically negative in what I described above; its just "markets". In fact, here's the counter-argument to the point the article makes about it being negative: Why would I, as an Investor, purchase a slice of the pizza delivery app Sliceline at IPO if I cannot make a return on that investment? Framework, the company making fully upgradeable and repairable laptops, needs funding; why would I invest in them if not to see a return on investment? I'm a homeowner; maybe I shouldn't purchase a painting from a struggling local artist; after all, it probably won't see a return on investment.
I intentionally slid down the slope of examples there to prove a point. Imagine you Have Money; maybe a lot of money, let's call it N dollars. How you spend that N dollars communicates your morals, ethics, and values; it defines what your future looks like, and at large enough values of N, progressively starts defining what the future of our society looks like.
A recent tweet, which I haven't found but you can search for, paraphrased: "In ten years, my husband's salary has increased 90%, while mine has increased 18%. I've spent most of that time curing cancer; he's been optimizing ad click rates."
What we're talking about is a phenomena I'd label as The Assetization of Everything. The vast majority of the monetary expenses wealthy individuals and corporations make is viewed through the lens of return on investment. Its very rare to see a corporation, or even wealthy individuals, say "we believe in X, we believe X is good for our society, so we are giving X $10M". "Investors" would ask: Wait, are you getting stock? Is it a loan? Can you write it down on your taxes? What's going on? Yet, anyone is totally able to do this. Its not because of some law, though corporate fiduciary duty isn't helping. Federal Reserve policy did accelerate it, but its not the cause. The cause is Cultural. It can't be fixed.
We, the world, are approaching the endgame of this very quickly. It won't be pretty. We are not allocating even adjacent orders of magnitudes enough resources toward solving problems that represent existential threats to, at minimum, our way of life; maybe society as we know it; possibly civilization; unlikely, but, the human race. Its not going to start with any of the traditional culprits though; AI, global warming, killer virus, whatever. It'll start with something that seems rather inane: it'll get harder and harder to find investments which generate returns. Put another way: deflation; we had an era of ridiculous prosperity where we could have allocated resources to stave off the coming actual crisis, but we didn't, and now no one wants to invest in solving them.
If you think prosperity is bad for the planet, read up on the environmental devastation wrought by communist countries. When people are poor and cold and hungry they don't give a crap about the environment.
I’m very interested in this topic and familiar with the background material, but the author’s prose is so poor I can’t make heads or tail of this article.
Even if it's not a peasants' revolt by definition, the peasants' (rural population, working class, non-intelligentsia) support him. So it is a de facto peasants' revolt.
This would be remedied if newly created money was credited directly to people's accounts rather than given to banks to lend out.