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Why the Rich Hate Inflation: Because They’re Creditors?

September 18th, 2014 No comments

Paul Krugman and assorted others have been puzzling at this question recently, one that I’ve been grinding an axe about for some years. For the first time, I think, Krugman’s highlighted the explanation that I keep going on about:

Inflation helps debtors and hurts creditors, deflation does the reverse. And the wealthy are much more likely than workers and the poor to be creditors, to have money in the bank and bonds in their portfolio rather than mortgages and credit-card balances outstanding.

Higher inflation means debtors pay off their loans in less-valuable dollars. So given an outstanding stock of trillions of dollars in fixed-interest loans/bonds, an extra point of inflation should transfer tens of or hundreds of billions of dollars a year in real buying power from creditors to debtors (without a single account transfer happening). Instantly and permanently.

I got some judicious pushback on this thinking in comments from JKH over at Interfluidity, where I had emphasized that rich households own the banks. (The top 20% actual own more like 85% of corporate equity.) While the 20% certainly have debts, they owe them mostly to themselves as bank shareholders, so The-20%-As-Debtors don’t benefit from the cheaper payback caused by inflation; it’s a wash. The 80% do get that benefit (and the 20% suffer), because the 80% owes money, on net, to the 20%.

I tried to simplify the situation with this:

Isolating one component that bank shareholders can be sure of, in a sea of complex and uncertain effects.

Imagine a bank (owned by shareholders, all in the top 20%) that owns a bunch of 30-year fixed-rate loans (borrowed by 80%ers) that won’t expire for 15 years. No ongoing lending by the bank. It just holds these loans and collects interest.

All interest is paid at the end of the year.

The banks’ interest revenues on those loans this year were $1 billion. Expenses were $100 million. $900 million in profit, all distributed as dividends.

Inflation over the next year (and ensuing) is 1%/year.

The bank again makes $900 million in profits, and distributes it to shareholders.

But the 80%er borrowers only pay $891 million in real buying power, and the 20%er shareholders only receive $891 million.

The next year, $882 million in buying power. Etc.

JKH pointed out out again that this only addresses inflation’s effect on the banks’ assets, not their liabilities. Very good point. Here’s an effort to address it, starting with the Balance Sheet account for Financial Business in the International Macroeconomic Accounts. (I averaged the balance sheets for 2003-2012 to get a big overall picture.) Click for larger image.

Screen shot 2014-09-18 at 8.08.15 AM

Now to ask: from the perspective of the 20%er shareholders/bank-owners, what effect will inflation have on these various assets and liabilities?

In many cases it’s quite uncertain (the whole point of the Interfluidity post linked above). They may presume that “Equities and investment fund shares” will go up along with inflation, for instance, so that’ll be a wash. What about “Insurance, pension, and standardized guaranteed schemes”? (I love “schemes” here.) Inflation should help them there, perhaps a lot, but how much and how will those schemes transform over future years and decades? Again, pretty uncertain.

But debt and debt securities are predictable, at least to the extent that they’re fixed-rate loans. Inflation hurts creditors. Period. Let’s just look at those assets and liabilities (click for larger):

Screen shot 2014-09-18 at 8.38.24 AM

Not all of these are fixed-rate, but we can assume that most of them are. (Estimates welcome.)

Here, banks’/20%ers’ assets (what others owe them) exceed their liabilities (what they owe others) by 12 trillion dollars. They’re net creditors. No duh.

To the extent that this stock of outstanding obligations is fixed-rate, an extra point of inflation will decrease 20%ers’ buying power by $120 billion a year.

Now you may suggest that that’s actually small change. It’s roughly 3% of the 20%ers annual income from capital,* and only $6,000 a year for each of the 20 million households in the top 20%. But you can be quite sure that that number is at least one order of magnitude larger for households in the top 1, .1, or .01%.

If the top 1,000 or 10,000 households (who dominate policy) perceive themselves as losing, say, $600,000 a year in real buying power for each point of inflation, are you curious why they hate inflation?

* Rough calculation of 20%ers’ capital income: (National income of $15 trillion – 60% of income going to labor) * Top 20’s 85% share of capital ownership = $5.1 trillion

Cross-posted at Angry Bear.



A Quarter Century of American Prosperity: Four Graphs

September 8th, 2014 No comments

If you equate wealth and prosperity (not a crazy equation), then one of the best measures of a country’s prosperity is median household net worth. It arguably says a lot more about prosperity than various income measures. It tells you how the typical household (50% have more, 50% have less) is doing.

If lots of households have lots of wealth, that’s pretty much a description of a widely prosperous country — the kind we built in this country in the 20th century — at least until the late 70s/early 80s.

The best estimates we have of this measure come from the Fed’s triennial Survey of Consumer Finances. It started in ’89, and the ’13 report just came out, so we now have twenty-four years of surveys to look at.

Here’s what that quarter century looks like:

scf graphscf legend

Here it is zoomed in on the bottom 60% of Americans:

scf graph bottom

Top 10%: Up 61%, even with the post-’07 decline. (Top 1% and .1% got richer way faster even than that).

Upper middle class (60–90%): Up 25-32%. Pretty darned good. (Remember, these are inflation-adjusted dollars.) Imagine if we’d all done that!

Middle class (40–60%): Down 18%. Prosperity! Freedom!

Lower middle class (20-40%): Your net worth is down 50% from 1989. It’s been diving since ’95 — almost 20 years.

Lower class (bottom 20%): A huge spike — you’re up 85%! Except: 1. Your holdings are still trivial — $6,100. You’re only two or three months from being on the street. And: 2. You’re down 40% in the last twelve years. Here’s that graph zoomed in:

scf poor graph

If you’re  in the bottom 60%, here’s how you’re doing compared to the top ten:

Screen shot 2014-09-08 at 7.13.40 AM

I’ll say it again:

Widespread prosperity both causes and is greater prosperity.

We could all (collectively) be much richer right now, even as we could all be much richer.

A nod to income, and how it builds wealth: Say you’re a 50%er. Now imagine that in 2007, you and your friends were making $94,000 a year instead of the $76,000 you actually made. (That’s how much you would have made if wages had gone up with productivity — GDP per hour worked — since the 80s.)

Think we’d all be more prosperous?

Cross-posted at Angry Bear.

A Definition of Money Is Not Sufficient, But it Is Necessary to Understand Economies

September 3rd, 2014 19 comments

Paul Krugman takes aim today at me (though he doesn’t know me from shinola), and others of my ilk who are at least somewhat obsessed with coming to a coherent definition of “money.”

…people who spend too much time thinking about money in general — specifically, on trying to decode money’s true meaning and find the real, true measure of the money supply; they end up starting to believe that everything in economics hinges on getting that measure right, when in fact almost nothing does.

He’s certainly — obviously — right that defining “money” coherently would not be sufficient to give economists an understanding of how economies work. But I’m here to suggest that it is a necessary condition — that absent such a definition, economists are inevitably fated to wrestle endlessly with incoherent understandings of how economies work.

Economists are like physicists trying to ply their trade without a coherent, agreed-upon definition of “energy.” (That definition is not conceptually simple, but it is coherent and agreed-upon.) Absent that definition, physicists’ discussions would devolve into exactly the kind of unending, unresolvable mare’s nests that are the ubiquitous norm in economics. Cue Truman’s “one-handed economist.”

Without a coherent definition of “money,” it’s impossible to have a coherent discussion — or arguably, even a coherent understanding — of how economies (inevitably, monetary economies) work.

I’ve written repeatedly (you could start here or here) about what I consider to be economists’ central, crippling confusion: even some of the most careful money-thinkers out there (e.g. Isabella Kaminska, J. P. Koenig Koning) frequently confute “money” with “currency-like things.” It’s understandable — we’ve always considered Roman coins to be “money” — but it’s a vernacular understanding that considered carefully, is conceptually incoherent.

I’ll end by again bruiting my preferred definitions of “money,” “financial assets,” and “currency,” and pointing to my many previous posts explaining those definitions’ undeniable virtue (and difficulties):

Money is the exchange value embodied in financial assets.

Financial assets are legal constructs defining claims. The exchange value of those claims is “money.”

Physical currency consists of physical tokens representing balance-sheet credits (claims), so it is actually an extra step removed from being “money.”

So financial assets (even dollar bills), which embody money, cannot “be” money.

These definitions cannot be “true.” I only suggest that they are the most useful, coherent definitions for thinking about economies that I’ve been able to come up with.

To return to Krugman: by this definition, the most useful measure of the money stock (in understanding and exploring how economies work) is not any measure of currency-like things (M1, M2, MB, even divisia measures), but household net worth.

In the big picture, the money stock = household wealth: households’/people’s net stock of claims on all our real stuff (tangible and intangible). Or to be conceptually precise: the money stock = the exchange value of those claims.

Cross-posted at Angry Bear.

How We Reduce Poverty, and How “The Market” Doesn’t

August 1st, 2014 1 comment

Matt Bruenig gives us a great breakdown of what poverty would look like if we relied on the market to solve it (as we did almost exclusively for thousands of years before the emergence of enlightened modern welfare states over the last two centuries).

The poverty rate among the elderly would be > 45%. (Old folks with long memories: sound familiar?)

Thanks to Social Security, Medicare, etc., it’s 9%.

Here are Matt’s numbers in graphical form for easy digestion:

Screen shot 2014-08-01 at 8.46.54 AM

Read the whole thing.

Cross-posted at Angry Bear.

The Reagan Revolution, In One Graph

July 30th, 2014 No comments

Policy Prefs: I’m Right at the Peak of America’s Bell Curve. Where Are You?

July 29th, 2014 No comments

The idea of democracy is to give the people what they want, right?

Ezra Klein points us to a great study by Ray LaRaja and Brian Schnaffer examining policy preferences by political donors (5% of the population) vs. non-donors (95%).

Here’s my rendition of the results:

Screen shot 2014-07-29 at 10.48.43 AM

Whose preferences would you say are embodied in our current government?

Non-donors as a group are pretty coherent, and seem to give a good representation of what Americans want.

Donors, perceived as an entity, not so much — the group is downright schizophrenic, in particular due to that anomalous bulge at the right. And that 5% or .5% determines what we get — not the 95%. (Money? Pernicious? Feh.)

Now: ask yourself where the self-professed liberals and conservatives that you know land on the left-hand graph.

Just sayin’.

Cross-posted at Angry Bear.

The New Synthesis? Market Monetarists Meet New (and Post?) Keynesians on Helicopter Drops

July 27th, 2014 No comments

A a year or so back I highlighted David Beckworth’s great post on Helicopter Drops. And the world’s best econoblogger, Steve Randy Waldman, did as well. (A “fantastic post,” he said.)

I’ve been pinging ever since to see a response to that post from Market Monetarist opinion-leader Scott Sumner. (AS SRW said, what we’d gotten from him was largely “quibbles.”)

I won’t rehash it all here but rather point you to Nick Rowe’s wonderfully successful effort to bring it all to conclusion, synthesizing Market Monetarist and New Keynesian thinking into support for a policy proposal that I think Post-Keynesians and MMTers would also jump on with gusto. (Also read the comments to Nick’s post, including one from Scott Sumner.)

I feel quite sure that Democrats/Liberals would embrace the policy wholeheartedly. Republicans/Conservatives, unfortunately, would consider it to be heresy and apostasy (often-sensible but utterly toothless Reformocons nothwithstanding).

Which pretty much clarifies where the problem lies…

Cross-posted at Angry Bear.

Nassim Taleb: Two Myths About Rivalry, Scarcity, Competition, and Cooperation

June 28th, 2014 2 comments

I’m delighted to find that someone with the necessary statistical chops has answered a question I’ve been asking for a while: Have any of the 130+ evolution scientists who’ve savaged Wilson and Nowak’s Eusociality paper (and Wilson’s Social Conquest of Earth) gone deep into the maths of their model (laid out in their technical appendix)? I check periodically, but don’t follow the field carefully.

According to this Taleb Facebook post, the answer’s still no, almost four years after the paper was published.

Emphasis mine, links in the post:

There are two myths that prevail in academic circles (hence the general zeitgeist) because of mental contagion and confirmatory effects (simply from the way researchers look at data and the way it is disseminated): 

1) That people are overly concerned by hierarchy (and pecking order), and that hierarchy plays a real role in life, a belief generalized from the fact that *some* people care about hierarchy *most the time* (most people may care about hierarchy *some of the time* but it does not mean hierarchy is a driver). The problem is hierarchy plays a large role zero-sum environments like academia and corrupt economic regimes (meaning someone wins at the expense of others) so academics find it natural so they tend to see it in real life and environments where if may not be prevalentMany many people don’t care and there is no need to pathologize them as “not motivated” –academics who publish tend to be “competitive” and “competitive” in a zero-sum environment is deadly. I haven’t seen any study looking at things the other way.

2) That “competition” plays a large role compared to *cooperation* in evolutionary settings –of course if you want ruthless competition you will find examples and can model it with bad math. The latter point is extremely controversial, Wilson and Nowak have been savagely attacked for their papers (with >130 signatures contesting it) and, what is curious NOBODY was able to debunk the math (very very very rigorous backup material). If Nowak/Wilson were wrong someone would have shown where, and in spite of the outpour of words nobody did.

I’d condense my thinking on the subject as follows:

1) People mistake rivalry for scarcity. If one tribe excludes all the others from a water source, forces them to do their will to get water, there’s obviously scarcity, right? Wrong.

Don’t get me started on the sacralization of (largely inherited) “property rights,” ownership — the right to exclude others.

2) They don’t understand that competition’s only virtue is increasing and improving cooperation. Cooperation — non-kin altruism, eusociality, etc. — is the thing that got us to the top of the food chain. Cooperation is what wins the battle against scarcity.

Competition fetishists think that competition is always good because it sometimes improves cooperation, even though it frequently does the exact opposite.

Think: trade wars. Or just…wars.

Cross-posted at Angry Bear.

The Pernicious Prison of the Price Theory Paradigm

June 5th, 2014 3 comments

Steve Randy Waldman has utterly pre-empted the need for this post, cut to the core of the thing, in the opening line of his latest (collect the whole series!):

When economics tried to put itself on a scientific basis by recasting utility in strictly ordinal terms, it threatened to perfect itself to uselessness. 

But I’ll try to help a little. What that means:

In the mid 20th century, economists decided:

It’s impossible to measure absolute utility. We can’t say what the value to you is of a heart bypass for your mother, or the value of a college education for your kid, or the value of (you or someone else) buying a third or fourth Lamborghini.

So we’re simply going to punt, and only talk about ‘preferences’. For our discipline, in its scientific impartiality, absolute utility — because we can’t measure it — will effectively not exist.

Inside our hermetic logical construct, we not only aren’t able to think about absolute utility — actual human value — we are forbidden to do so. Barred.

And with this spectacular piece of rhetorical legerdemain, the discipline disavowed itself of any responsibility for the implications and effects of that rhetorical legerdemain. (It’s hard not to be impressed.)

The effects? Economic analysts must assume, prima facie, that a billionaire buying a third or fourth Lamborghini delivers the same value as buying a college education for your kid or a heart bypass for your mom.

Who are we to second-guess preferences? They’re all the same price, right?

The (inexorable) implications? Concentration and distribution of wealth and income not only don’t matter. For economists who aren’t willing to tear open the prison door (at serious risk to tenure and employment), they can’t matter.

Steve explains it all far better, with circles and arrows and a paragraph on the back of each one explaining how each one is to be used as evidence against us. But I hope this little summation helps.

Cross-posted at Angry Bear.

The Five Best Nonfiction Books

June 2nd, 2014 11 comments

Okay fine, not the best. (Click bait!) But for me, the most important — the five books that, more than any others, taught me how to think about the world.

A friend in my “classics” book group asked me for nonfiction book recommendations. Here’s what I wrote:

The NF books that wow me, get me all excited, have me thinking for years or decades, are ones that are comprehensible to mortals but that transform their fields, become the essential touchstones and springboards for whole disciplines and realms of thought. Writing for two such disparate audiences is insanely hard, and the fact that these books succeed is a big part of what makes them brilliant.

Also books that cut to the core of what we (humans) are, how we know. (So, there’s much science tilt here, but far bigger than arid “science.”)

“I don’t know how I thought about the world before I read this.”


“Yes! That’s exactly what I’ve been kinda sorta thinking, in a vague and muddled way. THANK YOU for figuring out what I think.”

These books let you sit in on, even “participate,” in discussions at the cutting edge of human understanding. They make you (or me, at least) feel incredibly smart.

And they’re fun to read — at least for those with a certain…bent…

Probably have to start with Dawkins’ The Selfish Gene. When it came out in ’76 it crystallized how everybody thought about evolution, hence life and humanity. The amazing Dawkins, amazingly to me, has become kind of hidebound and reactionary in response to new developments since then (group/multilevel selection, inheritance of acquired characteristics), but the new information and new thinking that make parts of this book wrong, couldn’t exist without the thinking so beautifully condensed in this book. Might not need to read the whole thing, but it’s pretty short and you might not be able to resist. Very engaging writer and full of fascinating facts about different species and humans. Also the place where the word “memes” was coined.

Steven Pinker. The Blank Slate: The Modern Denial of Human Nature. The most important book I’ve read in decades. Philosophy meets science meets sociology, anthropology, psychology, politics, law… Pinker’s core expertise is in language acquisition, how two-year-olds accomplish the spectacularly complex task of learning language (see: The Language Instinct: How the Mind Creates Language.). He has a love-affair with verbs, in particular. Just loves those fuzzy little things. But his knowledge is encyclopedic and his mind is vast. And he’s laugh-out-loud funny on every other page. Also incredibly warm and human. I have such a bro-crush on this guy. (Also: everything else he’s ever written, including at least some chunks of his latest, The Better Angels of Our Nature: Why Violence Has Declined.)

Daniel Kahneman, Thinking Fast, and Slow. Kahneman and his lifelong cohort Amos Tversky (sadly deceased) are psychologists who won the 2002 Nobel Prize — in Economics! — for their 1979 work on “Prospect Theory.” (Fucking economists have been largely ignoring their work ever since, but that’s another subject…) About “Type 1″ and “Type 2″ thinking: the first is instantaneous, evolved heuristics that let us, e.g., read a person’s expression in a microsecond from a block away. The second is what we think of as “thinking” — slow, tiring, and…crucial to what makes us human. Interestingly, in interviews Kahneman says that he almost didn’t write this book, thought it would fail, for the very reason that it’s so great: it addresses both mortals and the field’s cutting-edge practitioners, brilliantly. The book’s discussions of his lifelong friendship and collaboration with Tversky are incredibly touching.

E. O. Wilson, The Social Conquest of Earth. Q: How did we end up at the top of — utterly dominating — the world food chain? A: “Eusociality”: roughly, non-kin altruism. Wilson knows more about the other hugely successful social species — insects and especially ants — than any other human. He basically founded the field of evolutionary psychology with his ’76 book, Sociobiology. As with the others, this is deep, profound, wide-ranging, and incredibly warm and human in its insights into what humanity is, what humans are. Those things that are wrong in The Selfish Gene? Here’s where you’ll find them.

Michael Sandel, Justice: What’s the Right Thing to Do? Philosophy. It draws on some scientific findings, but mainly this is very careful step-by-step thinking through a subject, a construct, that is not uniquely human, but close. (Elephants, apes, etc. do seem to care about justice, sort of.) I find it especially engaging and important because it addresses and untangles the central political arguments of recent times — is it “just” to make everyone better off by taking from the rich and giving to the poor? Should individual “liberty” trump individual rights? What rights? Etc. This book did much to help me comb out my muddled thinking on this stuff.

Morton Davis, Game Theory, a Nontechnical Introduction. Stands out on this list cause it’s not one of those “big” books. Available in a shitty little $10 Dover edition. But it’s an incredibly engaging walk through the subject, full of surprising anecdotes and insights. And he does all the algebra for you! The stuff in here makes all the other books above, better, cause they’re all using some aspects of this thinking. Here’s an Aha! example I wrote up: Humans are Pathologically Nuts: Proof Positive.

Okay, you noticed there are six books here. Did I mention click bait?

Cross-posted at Angry Bear.