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Why Does Quantitative Easing Benefit the Rich?

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Re: Why Does Quantitative Easing Benefit the Rich?

#31

Post by SpicyLemonZest »

elzbardico wrote: post #10
SpicyLemonZest wrote: post #4

This article strikes a very particular faux-neutral tone that should raise warning flags even if you tend to agree with where they're coming from. When you see lines like: > ultimately, their main goal: higher inflation. > It hopes that enough money would trickle down so the economy improves and inflation increases (so that basic stuff get more expensive for ordinary Joe). > While the central banks increase the overa…

Yes, that's the faustian bargain we've got when we decided journalism should be free on the internet. It is annoying, regrettable, but is just the way things are today: clickbait or die. But let's not this detail detract from the argument as it is solid and with serious possible implications that merit being discussed.

I've learned this lesson the hard way, but it's not a minor detail we can skip over. The article is shaped to ensure that we'll start yelling at each other if anyone tries to challenge the argument or question its implications. You can't bootstrap a respectful discussion on top of an article trying to get you riled up - it just doesn't work.

Re: Why Does Quantitative Easing Benefit the Rich?

#32

Post by imtringued »

clairity wrote: post #29
imtringued wrote: post #27

Earlier quoted context omitted.

How are you going to introduce negative interest rates?

are you implying that the (imputed) risk-free rate (which ideally the inflation rate would track exactly) is naturally higher than the fed rates would imply, so then we need set fed rates negative to induce a lower than 'natural' inflation rate? or is it just ambiguity around the use of dashes, which look like minus signs?

Just think about what 0% inflation means. It means your money never loses value. That's frankly impossible. It's as if you built some sort of pocket dimension that can store everything without decay.

During recessions people will try to acquire this magical storage instrument to shield themselves from losses in the real economy because a yield of 0% is greater than a company stock that is crashing. The people who end up unemployed don't store their labor in money. That labor is simply gone and so is the value of the money and that loss must be represented through a negative interest rate.

Re: Why Does Quantitative Easing Benefit the Rich?

#33

Post by clairity »

imtringued wrote: post #32
clairity wrote: post #29

Earlier quoted context omitted.

are you implying that the (imputed) risk-free rate (which ideally the inflation rate would track exactly) is naturally higher than the fed rates would imply, so then we need set fed rates negative to induce a lower than 'natural' inflation rate? or is it just ambiguity around the use of dashes, which look like minus signs?

Just think about what 0% inflation means. It means your money never loses value. That's frankly impossible. It's as if you built some sort of pocket dimension that can store everything without decay. During recessions people will try to acquire this magical storage instrument to shield themselves from losses in the real economy because a yield of 0% is greater than a company stock that is crashing. The people who end…

> "Just think about what 0% inflation means. It means your money never loses value. That's frankly impossible."

your causation is backwards. inflation is an emergent property of the economy, and can be negative or zero if it wants (e.g., japan).

> "That labor is simply gone and so is the value of the money and that loss must be represented through a negative interest rate."

this makes no sense. what interest rate must become negative when unemployment rises?

Re: Why Does Quantitative Easing Benefit the Rich?

#34

Post by mywittyname »

poulsbohemian wrote: post #25
sokoloff wrote: post #15

Earlier quoted context omitted.

Adjustment: You would typically pay capital gains on only around $2M of that. You’d likely qualify for the $250K per person exclusion on a primary residence and have several hundred thousand dollars of capital improvements that you’d made over that 35 year period.

Thank you for saying this! As a Realtor, I am constantly talking with people who are scared to sell a house because they are so sure they are going to be taxed to death, all while completely ignoring the big wad of cash that they will receive when they sell. People have an absolutely irrational fear of taxes to the point they do crazy things. Yes, I'm sure there are markets where if someone has lived in a house for d…

> People have an absolutely irrational fear of taxes to the point they do crazy things.

I've always wondered how/why otherwise smart people fall into this trap. There are calculators out there for anything and everything tax-related under the sun. See also: I don't want a raise because then I'll go up a tax bracket and make less money!

Then again, there are people who won't get married due to (legitimate) increased tax burden. There are also people who run otherwise successful businesses into the ground specifically to avoid paying taxes. I think some people are just really, really adverse to the idea of paying taxes. Like the idea hits them at some core, fundamental level.

Re: Why Does Quantitative Easing Benefit the Rich?

#35

Post by mywittyname »

imtringued wrote: post #27
clairity wrote: post #22

Earlier quoted context omitted.

i genuinely believe we should be clamping inflation to the sub-1% range (perhaps 0.1-0.3%), rather than 2-3%, so that gains would largely go to productive innovation rather than financialization. you’d still have slight pressure on capital to find productive uses, but not so much to relatively deflate labor income over a lifetime. rather than destroying capitalism, that would promote a more pure form of it (greed bei…

How are you going to introduce negative interest rates?

Negative interest rates are easy for the US Treasury to institute. They can only offer t-bonds that can be redeemed for less than the bonds were purchased for.

Businesses and such will have to go along because there's nowhere to store $10-$100 billion dollars in short-term, cash-equivalents. I'm willing to be that most companies auto-renew their short-term t-bonds at market rates. Thus, if negative yield t-bonds went on offer, they'd be bought up by the tens of billions. It would be news-worthy, but companies would be unlikely to really act any different as a result.

Long term, some companies might move currency to the treasury of another country, but that introduces risks involved with exchange rates which would greatly overshadow any potential interest gains.

If you look at the €/USD over the past ten years, it's pretty clear that storing USD in Euros to earn 0.2% in interest is for fools; the lowest ratio (ever) is like 0.87 and the highest was 1.58, and these two events occurred only 8 years apart. Even the month-to-month changes are rather dramatic. American companies doing business in USD are going to continue to hold USD regardless of negative interest rates.

Re: Why Does Quantitative Easing Benefit the Rich?

#36

Post by mywittyname »

blitzar wrote: post #16
dnautics wrote: post #8

inb4: "inflation helps people in debt and the poor are in debt" - the most poor in society don't have banking and can't be in debt. They're usually also VERY price sensitive. - typically the poor who have weak access to financial products are participating in e.g. payday lending, which has very high "APR"s and this debt is not intended to be amortized on "inflationary" timescales (you're supposed to pay back at the e…

> "inflation helps people in debt and the poor are in debt" Inflation helps with your debt when 1) there is asset backing the debt, in which case it is really leverage that you are getting or 2) if the debt is unsecured, the income servicing the debt would need to be subject to the inflation to reduce the burdeon. Inflation has occured in assets but not so much in incomes.

But inflation also causes the underlying assets to increase, usually at rates far beyond average inflation.

Yeah, the real cost of a mortgage will go down slightly over time. But the biggest benefits to getting a mortgage is to establish a cost basis which is no longer fixed to the cost of housing in a region (which can go up faster than inflation/wages).

Unsecured debt often has interest rates well beyond inflation, unless subsidized. So there's no win for consumers there.

Re: Why Does Quantitative Easing Benefit the Rich?

#37

Post by pashamur »

nichohel wrote: post #12

QE may make "the rich" seem richer in nominal terms, but in reality they are generally poorer. Here is what I mean: If the house I paid $250,000 for ten years ago is now "worth" $1,000,000 due to asset inflation arising from quantitative easing, I still own the same house. I am not really richer in a real sense as long as I still hold the house. I have $750,000 more nominal dollars in assets, but the dollar is just a…

The poorer/richer argument only makes sense in the context of a specific consumption basket. If your main goal in life is to buy as many bananas as you can (for example), then you would measure the house appreciation in bananas. Can you get more bananas for your house now (at $1M - 250k) than you could when you got it? Then you're "richer", otherwise you're not.

Usually we use CPI as a proxy for it. However, most people when evaluating houses ignore the implied rent paid; owning a house means not having to pay rent - and that has a specific price on it, depending on your local rental market. So in a relative sense, you owning that house makes you richer relative to the people that did not own a house (who did not get the same nominal appreciation at all and are much worse off), and leaves you at the same place with other people owning the house. You're unlikely to be worse off (on a relative standing) than if you hadn't gotten the house. So I'm not sure richer/poorer makes sense without considering the alternatives (i.e. renting & investing)

Re: Why Does Quantitative Easing Benefit the Rich?

#38

Post by ladyattis »

I find it odd that the article makes no mention of Richard Cantillon or the Cantillon effect. To summarize the Cantillon effect, whenever the money supply is increased those who first receive the new supply of money can purchase goods at the pre-inflationary rate/price and therefore gain the benefit of extracting more value from the money before the rest of the economy begins to notice and thus inflate their prices to correspond to the new supply. The result of this early receivers get more wealth from later receivers of the money, it's basically economic rent.

Re: Why Does Quantitative Easing Benefit the Rich?

#39

Post by wfn »

imtringued wrote: post #30
wfn wrote: post #9

Here's a nice related FT opinion article, "The rich get richer and rates get lower": https://archive.is/rMTnV It explains a sort of feedback loop taking place here (with regards to excess of money looking where to invest => "This pushes rates down directly, when those savings are invested, driving asset prices up and yields down; and indirectly, by sapping aggregate demand.")

The article doesn't explain why those savings aren't used for investments and why yields on investments are going down. Quite frankly, it's because population growth is slowing down. Children used to be an exponentially growing consumer market.

Hm, but the idea (in the article as well) is that savings _are_ being used for investments and overwhelmingly so; and because of this, investment returns are going down. Does this part need further justifying? If you have a finite amount of assets and instruments where money can be invested and you have more money being invested into them, you'll have lower returns in the end. Why this is in particular I guess depends on the asset class in question - e.g. as more money goes into index funds, the prices (of shares and therefore their indices) will rise, therefore lowering overall dividend yields (relative to share price). RE prices will rise, etc.:

"Atif Mian, Ludwig Straub and Amir Sufi agree with partisans of the demographic view, such as the economists Charles Goodhart and Manoj Pradhan (whose view I have spent fair amount of space on here), that a key contributor to falling rates is higher savings. Savings chase returns, so when there are more savings and the same number of places to put them, rates of return must fall.

Mian, Straub and Sufi disagree, however, about why there are ever more savings sloshing around. It is not because the huge baby-boom generation is getting older and saving more (a trend that will change direction soon, when they are all retired). Rather, it’s because a larger and larger slice of national income is going to the top decile of earners. Because a person can only consume so much, the wealthy few tend to save much of this income rather than spend it. This pushes rates down directly, when those savings are invested, driving asset prices up and yields down; and indirectly, by sapping aggregate demand."

> Quite frankly, it's because population growth is slowing down.

I thought the article dispelled this particular myth in particular, but maybe I'm wrong?

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