I’ve been wondering this question for a while. Ignoring current events, why is a little bit of inflation desirable?
I do understand that it’s done to “stimulate” the economy so people don’t let their cash rot in a checking account, but isn’t it a zero-sum game? Everybody says that money is not meant to stay where it is, rather, should flow through the economy. But if the economy always needs injections of liquidity because otherwise it fails, isn’t the economy broken?
I feel like there’s something I can’t comprehend about that.
In my mind, it’s not that inflation is good, but that deflation is far, far worse. The problem with deflation is your money buys more tomorrow than today, so you hold off spending it. Done en masse, that causes demand to drop. With people buying less, companies have to lower prices further, which means more deflation. It’s a self-perpetuating cycle.
Perhaps ideally we would be right on the knife’s edge between inflation and deflation, but we really do not have the ability to control the economy to that level of precision. The Fed can manipulate interest rates, print money, and that’s about it. Congress, if it wants to, can pull economic levers by raising and lowering taxing and spending. But these tools are not precision instruments, and they take months to reveal their effects.
If you try and aim for precisely 0% inflation, you’re likely to end up swinging between -1% and 1%. Which means you’ll be spending significant time in deflationary territory, risking a deflationary spiral. The Fed aims for a 2% inflation target. This gives them some buffer to hopefully keep us out of deflation.
I don’t understand why you call it worse, or even bad at all.
your money buys more tomorrow than today
This is evidently good.
you hold off spending it
Also good. Save money for retirement and emergencies.
Done en masse, that causes demand to drop
Less consumerism. Good again.
companies have to lower prices further
Still good. More acquisitive power for consumers, less money for CEOs, stockholders, and similar parasites.
More incentive to increase production efficiency and reduce waste, while proper regulations and actually punitive fines and civil and criminal responsibility for executives, board members, and stockholders keep salaries and quality up.
The concept of infinite growth has been raping and murdering the world for way too long. This looks like it would put a hard stop to it.
which means more deflation
So far so good?
It’s a self-perpetuating cycle
Sounds great, to be honest!
(Though, to be fair, prices would only keep lowering until goods are sold for what they actually cost to produce, including salaries and whatnot, with occasional drops due to increased efficiencies; the system would thus stabilise at an actually reasonable level, as opposed to the current ultraconsumerist madness.)
Think about your boss dropping your paycheck down to $200 a month (because money is so valuable now), but your rent is locked in at $1200 a month.
You need to think more communally.
Not wanting parasites to keep burning the world for short term profit is not thinking communally…?
That’s obviously not what I’m referring to. I ignored the environmental stuff as I don’t want to get off topic. Your points aren’t invalid, but they are off topic. Try to focus please.
Back to the actual economics we’re talking about. You’re thinking only about the money going into your pocket. You’re not thinking about the functioning of society as a whole. And you’re not looking more than two inches in front of your face. The deflationary cycle is also self-perpetuating because it also involves cutting demand for not just goods, but labor. Look at the Great Depression if you want to see what a deflationary spiral looks like.
What they should have said is that a system built on specific numbers going up to generate investment hype needs those numbers to keep going up and the easiest way to have the number go up is inflation.
It’s pretty simple. Borrowed money by the government can be paid back with inflated (less valuable) dollars.
Except in cases where interest rates are near zero so the Govt goes on a massive borrowing binge for over a decade, doesn’t pay any of that debt back, after 10 or 20 years has to roll it over at the now current interest rates moving closer to 6%… Eventually you can’t really just keep borrowing more to pay back old debt, even with a reserve currency where $30 of the $40 trillion is domestic.
Inflation means money tomorrow is worth less than money today. So you are encouraged to spend it.
At a macro-economic level, more money being spent is generally always good as it represents increased productivity (oh, and taxes). So a small amount of inflation is good for an economy.
High inflation means money tomorrow is worth much less which means things start to feel unaffordable.
Wouldn’t making sure that we were secure in the knowledge that we would always have access to the resources we need in the future be a better way to encourage spending since we’d no longer feel pressure to hoard it to guarantee our future security?
Hoarding bad, spending good. Timer on money = more spending.
Japan had deflation for 35 years, and keeps a mostly stable economy. Is inflation actually desirable? If you look at economics long enough it starts being about subjective politics, and systems people oversee and behave in. Somethings are true some times with certain goals, other things are true other times.
Inflation is more a byproduct of certain circumstances.
Japan had deflation for 35 years, and keeps a mostly stable economy. Is inflation actually desirable?
YES holly fuck Japan is NOT doing well. They seem to have survived but there are many structural problems caused by the “lost decades” -> economic stagnation.
…and even here it’s subjective. A 4.4 trillion dollar GDP (mostly driven by car companies, har har), a large role in globalized trade relations, less of a housing crisis than many places. A fairly thriving and unique culture and tourist industry.
They’re doing a lot better than many countries. So it all depends on what you think economics should do. Should it be about maximum profits and growth, or some other set of values ect… And that’s really difficult to pin down.
Personally I think it should ultimately serve the politics of the masses (eg. Be under democracy). Otherwise we’re all kind of slaves to it.
And their problems had nothing to do with deflation. They’re rampant consumerists and innovation chasers who just also happen to value conservative savings plans. They got outcompeted in the local area by cheap Chinese labor and their adoption of neoliberal economics did what it did everywhere else, sabotage their working class’s purchasing power even as they lost their foreign markets…
And they’re still the world’s fourth largest economy with the 12th largest and rapidly aging population.
You have 2 questions:
- Why is a little bit of inflation desirable?
- But if the economy always needs injections of liquidity because otherwise it fails, isn’t the economy broken?
Most replies I saw dealt with only the first question.
First off - why some inflation is good: you got some good answers, but from what I saw, people talked about savings and debt but not consumption. Let’s say you’re thinking about buying a new TV. It costs $200, which you have, but you’re still on the fence. If you know that the next month the TV will cost $201, that just might be the push you need to buy it. But why does the economic system wants you to buy the TV now? Because everyone wants to get money sooner rather than later.
“Wait, so it’s just a scam to get my money?” Kinda, but not in a bad way. Money isn’t real, and you don’t gain anything by just owing money (investments are another thing). The sooner everyone gets your money, the sooner they’ll be able to use this money to do stuff, which will stimulate the economy. The same mechanism (albeit with some qualifiers) also increases your paycheck at the same rate, so the only way you lose out is if your money is just laying there doing nothing.
Now to the other part: “But if the economy always needs injections of liquidity because otherwise it fails, isn’t the economy broken?” Money isn’t real, man.
The system doesn’t really get “injected” with anything. What happens is that the government (well, central bank) prints out cash and gives it to banks as a loan. The banks are always happy to get money because they can use it to give out loans of their own. The government gets the money back with (a small) interest, so they’re also happy (and that’s why inflation is, in essence, a form of tax).
“Whoa there, the banks have to give the government the money BACK? so, at some point the banks have to get all of their money and give it to the government!? This is so much wore than I thought!” No no no, the banks repay the loan with MONEY not CASH.
“OK, Dude, you lost me” So, this is where it starts getting a bit complicated. Let’s say you have $200 in your checking account. The bank doesn’t actually have a $200 bill with you name on it. You want your $200 in cash? Sure, the bank will pull a $200 bill from its vault, but it’s not your personal $200 bill in the vault, and you probably don’t even want a $200 bill anyway (you’ll just pay the $200 with a credit card or whatever, and the bank will transfer the money digitally), so why bother? The bank just has to have enough cash to give to people who want it. The central bank sets a certain percent of cash that the banks must have against certain assets (ex. they must have 20% of the value of all checking accounts in cash). When the bank gets more cash, what it actually gets isn’t money, but permission from the government to loan out more money to people who want it.
The government loans cash to banks. The banks then give loans to other entities (companies/people) who want money now and can probably repay it later. This has the side effect of increasing both prices and wages while encouraging entities to use their money so that companies will want to keep making stuff they can sell. Win-win-win-win. Well, except people who have money just laying around not doing anything and having it decrease in value, they are the ones who are paying the inflation tax.
Bonus question: “Ah, so the reason we don’t want the inflation to get too high is so that the people paying the inflation tax won’t get taxed too much, otherwise the more inflation the more wins?” Nah, the people who pay the inflation tax are mostly poor, so screw 'em. Like with everything in economics, it’s a balancing act. High inflation takes away stability. In the beginning I said “you know that the next month the TV will cost $201”. But in reality, you don’t KNOW it, you assume some inflation. If people think inflation will be 2% and it’s actually 2.5%, that’s fine for the most part. But if they think it’ll be 200% and it’s 250%, that’s a difference of half the money people had at the start of the year, and is kinda a big deal. Also, the economic environment can’t react immediately to a price increase, and if the prices increase faster than the economy can react, it starts to break things and creates a feedback loop that increases inflation even more (which takes away MORE stability). This is called hyperinflation, and what economist consider An Extremely Bad Thing. An inflation of around 2% is considered the sweet spot for most modern economies. This is also the exact reason the central bank is the one in charge of printing money (and is actually the main reason there is such a thing as a central bank) - printing money is a very easy solution to governmental budgetary issues, but is also extremely dangerous for the economy as a whole. Just having the government a theoretical option to go there takes away financial stability from the system, so it’s much safer to have an independent professional institution to handle it.
I think the real key to understanding how inflation can be desirable is to understand that when economists talk about inflation it is with the assumption that wages will rise by an equal amount.
And, generally speaking, this is actually true. There’s a lot of nuance to that statement, so please just trust that whatever counter you have is probably contained in the nuance. But, broadly, the math checks out. We will dig into that more, later. I promise.
So, the notion is that prices go up by 2%, and then your wages go up by 2%. So how does that help anything if all we’ve done by the end of the year is reset the status quo?
Well, there are two numbers that don’t get immediately affected when your pay goes up; your savings and your debts. With slow, gentle inflation, both of these things will, over time, shrink relative to your income, while your actual buying power should, ideally, remain the same.
Say you buy a car and you agree to pay $300 a month for it. Five years later, your pay has gone up by 10%, but your car payment doesn’t go up. It’s locked at the price you agreed at the time, meaning it’s now a smaller slice of your income.
Conversely, your savings effectively shrink every year. The combined effect of this is that people with lots of savings are encouraged to spend them, while people with lots of debts are rewarded. That means more money moves though the economy, creating a healthier economy, and it means that governments, who hold lots of debt, get to shrink that debt without ever having to pay it down. The UK government still holds debts from 300 years ago, because what was a massive expenditure at the time is now just a pittance. This is why governments can run permanent deficits (within reason) and not ever have to worry about the bill coming due; because it doesn’t.
For individuals, mild inflation benefits those who buy things on credit rather than outright, which under normal circumstances means us regular shlubs who need mortgages and car loans.
If you’re trying to understand why every business now cares only about juicing their share price and not about their long term health as a company, this is a big part of why. As inflation bites, the wealthy watch as their assets decrease in comparative value, so they want those assets to grow faster than inflation. That leads to a growth at all costs mentality.
So why isn’t this working? Well, one problem is the one I just mentioned; we’ll get back to that.
But the other reason is that not all inflation is the same. When prices go up because the economy is running hot, it means that the price of everything goes up. Everything includes your labour. But when prices go up because a pandemic made shipping more expensive, or because someone started a war in Iran, that increases the input costs your company is paying for whatever it is they do, but not their profit. So your boss doesn’t suddenly have a bunch of extra money to give you a pay rise. The value of your labour hasn’t increased, but the cost of things has. So we get price inflation without wage inflation.
So this is the real disconnect; there’s good invitation and bad inflation, and they’re not the same thing (and, frankly, the fact that we don’t have different terms for them is the cause of a huge amount of confusion and misunderstanding).
Healthy inflation is the natural result of growth in an economy. Economies tend to grow, because the human population of Earth tends to grow, which means more people doing more labour, making more stuff and buying more stuff. And of course, over time we develop new technologies and practices that increase the amount of goods each human can produce, which increases what each human can sell and thus what each human can buy.
(A quick aside here; the math generally seems to agree that global population will actually stabilize at some point, probably at around 10 billion. So the human growth portion of this equation is probably only over a specific timeline, and that’s without even factoring any kind of intentional degrowth.)
The problem is that what we’ve been seeing for much of the last decade isn’t inflation, it’s price shocks, the “bad inflation” that I referred to.
If you think back past 2020, you’ll recall that the word inflation really wasn’t in the public vocabulary in the same way. It was really only something that was being talked about by weirdo libertarians, who then used the combination of price shocks and massive government spending in the pandemic to sell this notion that this why governments shouldn’t spend money. This, of course, completely ignores that governments across the world spend truly unimaginable amounts of money resolving the financial crisis just ten years earlier and inflation remained so stubbornly low that Japan had to go out of its way to try to create some.
So, in short, moderate, controlled inflation good, price shocks bad.
In theory.
But of course, there’s more to it than that, because we all agree that the quality of life we can afford today and the quality of life we could afford even as recently as the 2000s are not the same thing. The Simpsons are supposed to be a working class family barely getting by and they live in a palace by modern standards.
This is because the way we measure “inflation” doesn’t work. At least, not for our purposes. To put it really simply, if you compare what we have now against the nineties, as a portion of our income TVs and computers have gone way down, while houses and college degrees have gone way up. That’s the problem. The things we want are cheaper while the things we need are more expensive. And as income inequality worsens, this problem only gets worse, because the wealthy can afford to buy up all the assets like housing, raising their price.
The other problem is that wages increasing in line with inflation relies on labour having the power to demand increased wages, and that’s something that’s being steadily stripped away from the poorest workers. Your six figure workers can still generally demand regular pay increases, or hop jobs for a bump, but the guys pulling shifts at McDonald’s aren’t seeing those same opportunities. So while, in aggregate, wages do tend to keep up with inflation, in reality the distribution is skewed. This is where governments need to step in with things like minimum wage increases which bring the floor up for everybody (this is why, in practice, minimum wage increases have never been observed to increase inflation; they’re just correcting the side of the equation that’s currently unbalanced) and why it is absolutely vital that we protect and encourage the ability for labour to organize and collectively bargain. If we’re going to have capitalism forced down our throats, mandatory unions should be a bare minimum guardrail.
So yes, steady, moderate inflation is good… And has absolutely nothing to do with why everything is unaffordable now.
when economists talk about inflation it is with the assumption that wages will rise by an equal amount.
And, generally speaking, this is actually true
You barely touched on the lack of wage growth that’s been going on since the 70s, not the 2000s. I’m no history buff, but historically speaking, it just doesn’t seem like this assumption holds without a massive amount of regulation, progressive taxation, and labor unions that we only really saw for a couple of decades.
I think this gets at a lot of people’s distrust of economists these days. The assumptions and status quo just conveniently ignore reality as seen by the working class in favor of capitalist propaganda. Why else would people start to question if inflation is even necessary when it’s not once benefited us in our lifetime?
Well, I did, just not in the way you were looking for.
Basically, it’s more complicated than that. When we talk about wage growth, we have to start with the question “Relative to what?”
So, the actual math says that, relative to overall absolute inflation, wages have, broadly, kept up. Adjusted for inflation, median US income in 1970 was about $84,800 (just using the US as an easy example here). Today’s median income in the US is about $83,800. So, like, it’s less, but not dramatically less. Statistically, those are the same number.
But that comes with a lot of caveats. First, we’re talking about wages as a whole, but that includes, you know, CEOs. And guys making $300,000 a year to write fintech software. While the aggregate of those wages have kept up, more or less, the distribution is increasingly skewed. That’s the problem with averages; they flatten out the details.
The second caveat is the one that I already touched on, that the things we want are cheaper but the things we need are way more expensive. In 1970 the median price for a TV would be $3500 in today’s money. And that applies to things like refrigerators, stoves, all kinds of stuff. But the price of a house was only a few years of your income.
But there’s also the fact that we shouldn’t just measure against inflation. When you measure wages against productivity, that’s where you see an almost total lack of growth since the seventies. So while it is mathematically accurate to say that - in aggregate - wages have kept in line with inflation it’s also completely reasonable to question why they’re not higher. If productivity keeps going up, shouldn’t we all have more stuff now than we did then? That’s what wages and costs ultimately boil down to; the things we can have. And in a world with so much more productivity it’s crazy that having a house and two cars was easier in the 1970s than it is today.
I actually never thought about that items like tvs or refrigerators or phones would have cost a lot in the 70s but a house wouldn’t.
I think that’s kind of a good system. Everyone could buy a house but people would have to save a lot to get luxary machines.
Gold star! A great ELI5.
I would just add one detail: the “healthy” inflation you refer to is the government printing a small amount of money, not the natural growth of the economy, since currency is fungible and affects the relative price of everything without bias. All other effects on inflation are really localized destabilization of market forces, which have a biased effect on the market and cause problems.
If the government prints too much money, that’s dangerous in a different way: money “moves” too fast for people to react. So a moderate amount of inflation like 1% is comfortable for an ordinary person to deal with, but the larger that inflation, the more difficult it is for people to react, because, well financial activity, like renegotiating a salary or changing the prices of apples or buying investments, moves at a fixed pace.
If money inflates, then everything else deflates relative to it (meaning people will want to hold anything else more than money relative to that money). The one caveat here is that there are different currencies inflating (due to money printing) at different rates (in addition to other market effects).
Great write up, thnx!
Focus on simplicity rather than details:
Deflation (opposite of inflation) encourages people to put money under the pillow and wait for it to increase in value. If everyone does this the economy stagnates.
Inflation encourages people to spend the money now or invest it. Your spending is someone else’s income and their spending is your income. Investing is you risking your money to have someone else buy something that hopefully makes them more productive.
Too high inflation causes loss of trust in the currency and people start hoarding bricks or something else non perishable and the economy stagnates.
So central banks say that they will manipulate the currency so that the inflation is around say 2% which is low enough for people to trust it but high enough to encourage spending/investing.
Deflation (opposite of inflation) encourages people to put money under the pillow and wait for it to increase in value. If everyone does this the economy stagnates.
I think this deserves a bit more discussion actually. I don’t think it’s a given that the economy stagnates nor that an ever-growing economy is a good thing.
At the end of the day, people must spend their money to get things they need. Hoarding money isn’t actually sustainable unless you already have more than you will ever need.
I actually think it sounds kind of nice to have an economy that is neither inflationary nor deflationary: it’s just stable because the economy is sized perfectly to sustain the people within it and make them happy.
It’s the insatiable greed that drives economic growth (at any costs it seems). I’m not sure whether population growth inherently grows the economy, because each new person is both an asset and a liability.
I think OP isn’t suggesting deflation, but equation. As in, keeping the value of a dollar stable rather than constantly changing. Like that Rick and Morty episode where there’s that machine that sets the value of $1 to $1
Not seen the episode so I’m not sure how it’s supposed to work.
A small inflation greases the wheels of the economy.
The central bank never hits the goal exactly, if you aimed for 0% you’d end up with sometimes inflation and sometimes deflation.
What is the value of one dollar anyway? When it was pegged to the gold the price of stuff compared to gold still varied.
So inflation isn’t actually good, it’s an active economy that’s good
Yes, but a healthy economy becomes more active if there is a healthy inflation to provide additional lube. 2% is roughly where inflation offers pretty good lubricant without being a pita
It’s worth calling out that there’s no real justification for that 2% figure. It’s a number that was pulled out of the air by the New Zealand version of the Fed in the late 80s, and it seems to work well, so everyone copied it.
There’s pretty broad consensus among economists that deflation is bad, and that inflation above about 3-4% is bad. Beyond that, we’re literally just guessing.
It’s a number that was pulled out of the air by the New Zealand version of the Fed in the late 80s, and it seems to work well, so everyone copied it.
I think it’s worth pointing out that it’s all part of the neoliberalism fad that originated around that time. There are other ways to run an economy, but this inflation target one works well for neoliberalism because the wealthy own assets which hold their value through inflation. The middle class and below have money, which loses value through inflation. They pay what money they do have largely (directly or eventually) to the wealthy who then use it to buy more assets.
Sorry I may have channelled too much Gary Stevenson there.
I have read that it’s also very hard to break out of deflation so you can’t just try it a little, and the same goes for hyper inflation. A bit like walking the razors edge.
Inflation itself is also good, assuming your salary goes up at the same rate.
If you take out a home loan, then over the 30 years you pay off the house, the mortgage payments make up a smaller and smaller part of your paycheck.
Same for car loans, and student loans.
Basically, inflation encourages smart use of debt.
That’s generally not true in practice though. Nominal interest rates on loans (the rate on paper) will adjust with inflation so the real interest rate (adjusted for inflation) is positive. As others have pointed out, the banks wouldn’t accept a loss just because of high inflation.
so basically inflation is good only if you are one of the wealthy ones. being able to get a job that pays enough so you dont have to live hand to mouth. can even get a loan, pay it off and still have some money left over to maybe live. Also having a job you can trust doesnt kick you off at moments notice is also required to even consider any debt.
Over the long term, wages go up. Over the short term, people get left behind.
There are lots of things that suck for individuals, but are good for the economy as a whole. There are also lots of things that suck for the economy as a whole and are great for a select few.
This is why the bedrock of any sane civilized population is public education. We try to give most individuals the opportunity to learn as much about how our society works as possible to give individuals the best chance at success available.
This is also why the current geopolitical situation was built on decades of undermining public education with homeschooling and “parent choice” initiatives. The USA’s “No Child Left Behind” Act created an entire generation of children ripped out of public schools after decades of defunding public education created such poor conditions that parents were duped into believing dismantling public education was the solution.
Uneducated kids become ignorant, easily manipulated voters. Social media algorithms were specifically engineered to exploit this mechanism.
Just want to point put the whole “Deflation makes people not want to spend” thing is bullshit conjured up by a wealthy economist.
In reality the inverse happens - deflation makes the general population spend and inflation makes people save. This is because if you’re expecting things to get expensive, you stop spending on things you might want so you can have money for emergencies and things you might need. This isn’t even theory - you can just look at historical spending patterns.
Inflation primarily benefits the wealthy, because hoarding billions is pointless under deflation.
I have read that it’s also very hard to break out of deflation so you can’t just try it a little, and the same goes for hyper inflation. A bit like walking the razors edge. What’s your thoughts on that?
It’s pretty easy to stop minor deflation - just print more money. You might have also heard why that’s usually bad - because it causes inflation. But in this case, if for some reason you want to limit or reverse it, printing is just one way. Others are by increasing exports and imports by decreasing / increasing taxes, raising interest rates on low, increasing taxes in general.
Of course, the difference is these measures strengthen a country, unlike control measures that deal with inflation. Even the first one is less harmful these days thanks to a very global economy and modern logistics, since spreading your currency has soft power benefits (it’s why the USA did so).
Controlling inflation on the other hand is more detrimental to a country, since the methods usually affect infrastructure (reducing taxes) or global trade (restricting imports to increase local spending). You can also print less money but that increases poverty.
Hence all the recessions in recent history.
This songs like it makes sense, but a reference would be very useful
https://360library.com/economics/deflation/common-misconceptions-about.html
This lists a couple of “recent” historical examples you can verify.
And here’s a more detailed analysis:
Could someone for once please explain what you guys actually mean when you say the wealthy are hoarding money? I don’t think I’ve ever gotten a straight answer to this.
Considering inflation causes money to lose value over time you won’t remain wealthy if you hoard it. What rich people have a lot of is assets that produce money, usually stocks and bonds.
It’s really just simple math.
Let’s say I make $2500 a month, and I buy a car. The payments are $250 a month, so that’s 10% of my income.
If Elon Musk buys a car, even though it costs $3 million, while my car cost about $35,000, he doesn’t even need a loan. He just buys it, and the change in his bank account is so small that he can barely see the difference. He could buy ten more cars like that and not notice.
And yes, he can keep buying cars, but at some point there just stop being more cars to buy. Lamborghini can only make so many new models every year.
Maybe I spend $25 on lunch. Maybe Elon spends $2500 dollars on lunch. He spent a hundred times as much as me, but he makes millions of times more than me, and he can only eat one lunch.
So at some point there’s just a limit to how much the rich can actually spend. Yes, it’s a lot more than any single one of us, but it’s a lot less than all of us put together. We spend, they save. Where my paycheck goes into rent, car payments, food, and so on, Elon’s money goes into investments. In fact, he’s mostly paid in investments. So my money goes to other people, whereas his money stays in his pocket.
Make sense?
Make sense?
No because it doesn’t answer my question. I asked about hoarding wealth - you’re talking about spending habits. Your average billionaire can’t just walk into a bank and withdraw, say 10 million. They probably don’t have anything even close to that much of liquid wealth.
Already have thousands of times over. My ‘net worth’ is almost entirely due to my ownership stakes in Tesla and SpaceX. I have <0.1% that is cash. Tesla and SpaceX employees all receive stock/options and Tesla is >80% owned by retail investors and index/pension funds, so value increases apply >80% to them.
From Elon’s twitter
Hmm. So, I think you’re struggling to understand how those two things are connected.
First off, when we talk about “hoarding wealth”, yes, we’re including assets in that. No one here is saying that Elon has 900 billion dollars in a big old Scrooge McDuck vault. Obviously it’s all tied up in shares, bonds, real estate, etc. That makes it technically less liquid, though in practice those issues are largely irrelevant, because a) as I was pointing out in my previous reply, what the ultra-wealthy spend is such a small fraction of what they own that in practice they rarely need to dip into their less liquid assets, and b) because even larger purchases can be handled by simply taking on very cheap debt using those same assets as collateral. Basically, your credit card runs at 20%, Elon’s runs at 2%.
More to the point, that huge hoard of assets is the problem. Because their ability to buy up investments (including things that really shouldn’t be investments, like housing) makes those things more expensive for the rest of us. They can buy all the housing and rent it back to us, instead of us actually being able to afford homes.
But ultimately talking about spending habits is the answer to your question, because those raw differences in what people spend versus what they make account for huge differences in how much of our wealth we can afford to hold onto. The fact that that wealth is stored in assets rather than a bank account is completely immaterial. Or, rather, it is material, but only further proves my point.
Think about it this way; Elon can afford to have 99.9% of his wealth tied up in assets where he cannot immediately access it, and can still live a life of luxury most people couldn’t imagine in their wildest dreams. Do you think the average 9-5 worker could afford to receive even 90% of their pay in the form of assets rather than money? Or would they just be selling those assets immediately to cover their daily costs? That, right there… That’s the problem.
I’m only focusing on the hoarding part here. I don’t understand what is being kept away from others. In the case of Elon, he owns shares in companies he founded. He’s not a housing investor. What seems to be implied here is that if you start a company and it grows too large then it gets nationalized or something. These are the specifics I’m trying to figure out here. Is Norway’s oil fund hoarding wealth away from the rest of the world? What you’re speaking of sounds more like criticism of the power that wealth comes with, but that’s not quite what’s being discussed here either.
OK, so let’s say you work in a company that makes cars. The workers make the cars. Their labour turns into products which the company then sells to make money. The company owner… Does nothing, basically. Management is done by managers, labour is done by labourers. Engineers designs the cars. Artists and marketeers sell them. Sure, maybe the owner is involved in a few tasks here and there, but even if they truly worked 120 hour weeks and obsessed over every little thing, their total contribution, judged as a percentage of the labour involved in making and selling those cars, would infinitesimal. Yes, they can make decisions about what new car to release, what direction to take the company, all of that, but they’re not the only person capable of making those decisions, they’re just the person who is allowed to make those decisions, because they own that privilege and no one else does.
And yet, that owner takes home billions, while the workers struggle to pay rent.
That’s the hoarding. That owner has those billions of dollars because their company sells cars. But they don’t make the cars, or even oversee the people who make the cars, they just… own it.
Now, I’m sure the counterpoint here would be that the workers have to use machines paid for by the owner. Except, the owner didn’t make those machines, they just bought them. Machines that were made with other people’s labour. If labour had access to the capital that the wealthy hoard, they could just start their own factory, sell cars that they make, and keep the profits (ie, a worker owned co-op). The wealthy owner isn’t providing, they’re gatekeeping. By controlling wealth, they control other people’s ability to deploy wealth, which in turn allows them to extract value from other people’s labour.
That’s the difference with something like Norway’s wealth fund. They’re publicly owned. The people of Norway benefit from what the wealth fund does. It’s a public good. But no one benefits from Elon Musk being rich. He didn’t even found Tesla; he paid the founders to give him the right to call himself the founder. This notion that he’s some kind of brilliant genius is a fabrication he invented about himself. He’s just a guy who had enough money to take ownership over the things that other people create. It didn’t take Elon Musk to come up with the idea of a company that makes rockets. We’ve been making rockets for thousands of years. But in a world where wealth is concentrated in the hands of a few, it requires an Elon Musk to permit people to make rockets, because he controls access to the wealth required to do so.
You’re right! They can’t just walk into a bank and withdraw 10 million!
Instead, they take out a loan for 10 million against a collateral of 20 million in stocks, expense the interest, claim 0 income and therefore no income tax, and have that transferred to their bank account. Then they withdraw 10 million, while their stocks continue to gain (or lose) value, and at some point they have to take some portion of their dividends as income rather than rolling them into more stocks or, God forbid, sell some of those stocks to pay back the loan.
In a technical sense, no, that money isn’t just sitting in a bank account, but there’s a weird effect. If you only have a small amount of stocks, say a few million worth, you can sell them off in a relatively short period without harming the stock because it’s just a blip at most in normal volatility. If you have a lot, say billions, you can sell enough to do whatever the average person would ever want to do with only slightly more volatility than is some nobody did it, and much of that is due to the visibility of a billionaire doing that. If that billionaire needs more than a few million, he can just follow the process outlined above with no impact at all to the stock market and a number of benefits to himself. So in a practical sense, if you only have a little stocks, say millions, accessing those millions may take days or weeks, but if you have billions, you can access it only slightly slower than I can withdraw $100.
This money is still in the economy and helping to economy to function overall, but the majority of that benefit is only experienced by one person, the billionaire. This is effectively them hoarding those billions, not because they’re sitting in an account but because a single person is experiencing the majority of that benefit while the rest is spread across thousands or perhaps millions of people.
I still don’t see what is being kept away from everyone else. Who is left without if I own a billion worth of stocks in different companies? The cartoon example would be me finding a cool rock that suddenly everyone in the village wants and I even get astronomically high purchase offers from the neighbouring villages but I choose to keep the rock to myself effectively making me the wealthiest person of the village - on paper. Is the rest of the village being deprived by that fact that I refuse to sell it and buy everyone a Lamborghini?
Is the rest of the village being deprived by that fact that I refuse to sell it and buy everyone a Lamborghini?
No, they are being deprived by the fact that billionaires are allowed to amass that amount of wealth without supporting society with it, i.e., taxes, labor laws that don’t allow the extraction of wealth from workers to the point that there is often an income disparity if 100000%, and comsumer laws that don’t allow vendors to charge exorbitant rates for basic necessities like food and housing and medicine. So someone can take trips to space and someone else can’t have food, in the more extreme examples.
You keep conflating artificial and unrealized value. Stocks have value, just like the cash in your wallet or the bits associated with your bank account. They aren’t physical things (even cash has no value based on its physical nature) but their value is real nonetheless. At least until society collapses and the only things that matter are the purely physical, anyways, at which point your cash will be just as worthless as stocks.
Note: I said hoarding billions - I didn’t say they’re hoarding it in literal cash. They’re hoarding it in value.
Inflation is beneficial if you have billions in value because what you can earn from interest rates and valuations (especially when you can tug at the strings of the stock market) alone will exceed what the inflation rate will be (barring economic collapse where there’s runaway inflation, like the Weimar Republic or Argentina).
This means that your purchasing power goes up since the general population’s and smaller business’ purchasing power goes down, since you can easily outpace inflation far greater than they can. This allows you to hoard more wealth by making it easier to buy up other companies or stocks - and the more you own, the easier it is to ensure that you control the general population’s wages or the growth of competitors and therefore increase your wealth further by staying even further ahead of inflation. If you’re an American even remotely paying attention to things, you might realize this cycle sounds familiar.
This eventually hurts the overall economy if never stopped of course (lack of general active cash flow), because eventually things become too unaffordable for the general population and they can only take so much debt… But if you and your cohorts keep at it, thanks to how the fiat system works, it’s fine. Because you’ll own so much of everything and have so much value hoarded that it doesn’t matter that inflation has crashed everything and your currency has lost significant global power, since you’ll be able to buy up anything else left that you don’t own (Btw, this isn’t hypothetical - this is how Putin and his cronies gained what they had, at the expense of a whole country). From there you and the oligarchs can basically run the government.
And that’s the big picture most people miss - it’s not about the money, it’s about power.
They’re hoarding it in value.
This is what I’m trying to get you to explain.
I’m gifted Mona Lisa, my net worth is now billion dollars. Am I hoarding billions in value?
I start a business and it becomes very succesful and it’s valued in billions and as a majority shareholder it makes my net worth now a billion dollars. Am I hoarding billions in value?I don’t understand who is keeping what away from everyone else. What is being hoarded exactly? What is “value” here?
I’ll assume you genuinely don’t grasp the concept, and not arguing in bad fath.
I start a business and it becomes very succesful and it’s valued in billions and as a majority shareholder it makes my net worth now a billion dollars. Am I hoarding billions in value?
If you are somehow 100% in charge in the production process of your business, and have no employees, and don’t meddle with politics, information distribution, pay your fair share of taxes, and (this is the important part) discovered a way to actually spend your billions in a way that actually reduces how much money you have so eventually you only have a couple millions, then no, you wouldn’t be hoarding wealth.
The reality is that all those things being true are extremely difficult and even more so rare - the only closest example I can think of in recent history being MacKenzie Scott.
Now, the reason the last point is important is because if you _don’t _ spend that money significantly, you actually start to contribute to inflation yourself because more money has to be printed so everyone else doesn’t run out, because otherwise you’d see economic collapse.
Except then comes the issue of spending billions - it’s extremely difficult to spend that money, _ without making more money._ A bit tongue and cheek, but to get an idea of how that would you can watch an old movie called “Brewster’s Millions” that’s a decent visual example. And in case you’re getting a little lost again, value = money. If you make more money despite spending it, you are, whether purposefully or not, hoarding it.
This leaves you with only 3 options to not hoard:
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The government taxes the excess. This would also help control inflation. This hasn’t happened because of billionaires that want to hoard money. A recent example is the misinformation campaign in California.
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Donating to charity. This is surprisingly difficult and takes years. See MacKenzie Scott.
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Divvying up your value among all your workers. The easiest way to actually not hoard billions.
What is “value” here?
Here’s the most absurd part about it all - value is literally perception. It’s even worse under a fiat system because that valuation isn’t even tied down to something fixed and physical like with the gold standard, but can be tied to a commodity like oil.
The benefits are a country not rich in a certain resource can still generate a lot of value. But fiat still has many issues, like how easy it is to manipulate value. This leads to excessive inflation and way more economic bubbles and recessions.
So to recap; value = money = power. Value also = money^x when high and concentrated enough.
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The relative amount of spending that rich people do to their net worth or whatever is much much smaller than the amount of spending middle class and poor people do.
If you think of a minimum wage worker who rents, nearly every dollar they make is back into the economy nearly immediately.
I on the other hand have maybe a third of my yearly income sitting in a high yield savings account.
Someone calculated that the amount that musk spent on the elections was the equivalent of a minimum wage worker spending like $30. He’s not doing that daily so he’s not using the equivalent amounts of money.
That is not what I asked about, though. The claim was that they’re hoarding money/wealth. This makes it sound like they have a lair full of chash somewhere like Scrooge McDuck.
Musk owns multiple succesful companies. His “wealth” is the value of these companies. You can’t buy a house by stating you own SpaceX, they want cash.
Not sure about the hoarding wealth thing, but
You can’t buy a house by stating you own SpaceX, they want cash.
You basically can, since the bank will give you a loan at almost no interest with your shares as collateral.
You can’t buy a house by stating you own SpaceX, they want cash.
Actually, you can say that SpaceX is worth x million dollars and offer it as collateral for a loan and because its an extremely large amount of collateral you’ll get an amazingly low interest rate and never have to use cash for anything. This is pretty much exactly how the Twitter purchase went down.
Ohh I thought you meant something else
I do understand that it’s done to “stimulate” the economy so people don’t let their cash rot in a checking account, but isn’t it a zero-sum game?
The issue isn’t keeping money in a checking account, but under your mattress. Even in a checking account, your bank can still use a part of the money to create loans. Under your mattress, the money does nothing and that makes it more expensive for people who need money to pre-invest in something.
But if the economy always needs injections of liquidity because otherwise it fails, isn’t the economy broken?
Kind of, but requiring cash on hand with no lending at all breaks the economy a lot more. It forces all investment to occur to only people who have money and it makes running out of money a much easier thing to happen. If you read accounts of eras where money was much harder to be lent, you’ll see cash flow issues were much more significant even for large companies and corporations.
To add to this. In a lot of the developed world, you want to build a big resort, you make a business plan, you get investors, you secure a loan, and you build a big resort. In Mexico, it’s hard to secure those investors and cash flow, due in part to the uncertainty of the economy. So they build part of that big resort, say the first 10 floors of a 25 storey building. Then, as they get more money, they finish the building, then add more parts to the building. This is a limited example of what liquidity in the economy can mean - the ability to big things now rather than smaller steps over time.
To add onto your example, the Mexican company likely had the business plan to build out the 25 story building and fill it with guests immediately. Instead, they can’t. They also can’t build in as many amenities because they don’t have the number of guests to support it.
An American company can build the larger resort and fill it with guests immediately; making more money on day 1 even taking into account the interest they need to pay back. The Mexican company would find it much harder.
Musical chairs wouldn’t be much of a game if there were enough chairs for everybody. Oligarchs want everybody scrambling because it makes their pseudo-slavery easier to maintain.
Let me add: I’m an engineer. By reason of existence, my work involves improving how we do stuff. My work involves helping people work more efficiently, use fewer resources, cost less etc. We should be doing more, with less because the tools and methods get better. So why do things keep getting more expensive? I don’t grok inflation. Not a bit of it.
Theoretically wages should be getting bigger to at least keep up with inflation (due to improving technology and the like they should be beating it), but in practice capitalist greed means it doesn’t always work that way.
The right way to look at how expensive things are is to normalize prices to other things that also change with time, for example wages and expectations.
A car may be more expensive now than in 1960, but the car is faster, safer, more comfortable, and more people have one now.
Same with many improvements- an iPhone today is more expensive than a Nokia 3210 was in 2000, but it has more features and more people have one.
It is against human nature to stay where we are and just use improvements to reduce the amount of work we need to do. We want to have more. That may be a bad thing for sustainability, but we typically expect our governments to support that kind of progress, hence the dual mandate of the central bank to maintain economic growth with a high level of employment and a low level of inflation.
It is against human nature to stay where we are and just use improvements to reduce the amount of work we need to do.
To be clear though since the industrial revolution and until WWII improving technology has both improved quality of life and reduced working hours. The fact that working hours have stagnated at around 40/week is a historical exception that doesn’t get fully or even mostly explained by “we have more and better stuff;” if that was it we should be working 20 hour weeks by now. For more see David Graeber on the subject.
There is a lot of inequality that plays into this.
If you think about 90s Goldman Sachs style of 80-100 hours weeks, no weekends, no holidays culture that dictated “work ethic” expectations in American white collar jobs, to the post covid hybrid work and “quiet quitting” culture: I think the typical white collar worker works way fewer hours than 20-30 years ago, even though contracts said 40 hours the whole time. Anecdotally, a cushy office job at individual contributor level can be apparently kept while working maybe 1-2 hours a day. I know those are not typical, but it’s way more common than it used to. And my perception is that taking weekends and holidays off became normalized, and nobody is virtue signaling anymore that they worked the whole weekend, even if they did. People take their vacations.Now that doesn’t mean the hours of hourly workers, healthcare workers, construction workers, service and restaurant industry workers, etc, are getting shorter, but as I said, that is more a social equality problem than anything about the economy or inflation rate specifically.
Okay you’re basically right that effective necessary (so discounting bullshit) white collar working hours are declining, but also you should really read the book I linked. It expands on what you said here on multiple levels, and I suspect you’ll find it somewhere between interesting and enlightening.
I’ll check it out!
But lots of things do get cheaper. You can buy a fucking miracle device like a smartphone for a weeks work. Everything you want gets cheaper, everything you need gets more expensive.
Can of coke cost a penny. Now it’s closer to a buck?
yes, because that’s how we have organized things.
we could make housing a commodity, but we have chosen not to do so. we have made it an investment. not every economy in the world works this way, or has, historically.
and generally we rampantly resist the idea of commodifying housing, education, healthcare, and other resources. but we’re OK doing it in other areas. these are largely political and social choices about what we perceive as having value and how that value should function and how those goods should be distributed.
I’m also an engineer, and in my experience a reduction of blue collar workers gives only a temporary reduction of the work force; soon enough there will be more cost controllers, HR business partners and officers for all kinds of non value adding stuff. In my country we’re at the point where the people with bizarre job descriptions on LinkedIn are always posting about how to effectively employ the work force.
right, and what if you think this book is bullshit itself?
this concept that some jobs are ‘real’ and others are ‘fake’ is just class-confirmation bias that has no basis in economic reality. Sure you might think a teacher deserves to make 250K because their job is ‘real’ and a investment banker doesn’t deserve 2.5million, but the truth is people generally value the investment banker far more than the teacher and the 1000x pay is reflective of that, especially as the teacher doesn’t help them increase their own wealth.
forced pretense and bullshit is how most of the world works, this idea some there is some perfect world where you don’t have to pretend to care about nonsense to advance your career is delusional, there is no such world.
So clearly you’ve not read the book, which I mean fair enough but then at least try to understand what the argument is before disagreeing with it based on dogma. Here’s how it defines a bullshit job:
Final Working Definition: a bullshit job is a form of paid employment that is so completely pointless, unnecessary, or pernicious that even the employee cannot justify its existence even though, as part of the conditions of employment, the employee feels obliged to pretend that this is not the case.
The idea being that the person actually doing the work is in the best position to tell if their work actually means something.
this concept that some jobs are ‘real’ and others are ‘fake’ is just class-confirmation bias that has no basis in economic reality.
Good assertion, I hope you’re ready to defend it against…
Gerte: In 2010 I worked as a receptionist at a Dutch publishing company. The phone rang maybe once a day, so I was given a couple of other tasks:
- Keep candy dish full of mints. (Mints were supplied by someone else at the company; I just had to take a handful out of a drawer next to the candy dish and put them in the candy dish.)
- Once a week, I would go to a conference room and wind a grandfather clock. (I found this task stressful, actually, because they told me that if I forgot or waited too long, all of the weights would fall, and I would be left with the onerous task of grandfather clock repair.)
- The task that took the most time was managing another receptionist’s Avon sales.
The book is full of exciting testimonies like this. Which is to say, the assumption that bullshit jobs don’t exist is clearly false.
but the truth is people generally value the investment banker far more than the teacher and the 1000x pay is reflective of that, especially as the teacher doesn’t help them increase their own wealth.
Investment bankers actually wouldn’t fit the definition in thr book anyway, but also hell no? Plenty of people want there to be more teachers in the world, or at least would consider that to ve a good thing out of hand. I struggle to think anyone ever thought the world needs more investment bankers. Besides, education is the best investment an average person can make by a long shot.
this idea some there is some perfect world where you don’t have to pretend to care about nonsense to advance your career is delusional
Just world fallacy. Just because something is normal doesn’t make it not bullshit, but also clearly a farmer or factory worker’s career doesn’t inherently involve pretending to care about nonsense. You should really read the book, if only to disagree with it in a more educated manner.
“other people’s jobs are bullshit, but not mine”
inherently contradicts “The idea being that the person actually doing the work is in the best position to tell if their work actually means something.”
The argument is bullshit itself. But this book isn’t trying to make a coherent argument, it’s trying to sell books by appearing to people’s resentment that their job is important and everyone else’s is stupid and worthless. Which pretty much everyone believes because we are all egotistically biased.
I don’t need to read the book. The ‘argument’ has been around forever in various forms. ‘bullshit’ jobs have always existed and will always exist, and are just a product of ignorance and idealism that the world would be ‘better’ without them. Everyone hates administrators and bureaucrats and support staff and thinks they shouldn’t have to exist and ‘get in the way’ of them doing ‘real work’.
You know what another bullshit job is? firefighting. last time I checked most firefighters aren’t putting out fires every hour of everyday they work…
You legitimately have no idea what you’re talking about and I’m starting you doubt you’re even reading my replies in full. Unless you’re willing to give me a point by point counterargument like a normal person, this conversation is over.
Rich people love when number go up
Inflation, especially unexpected inflation, benefits debtors. The biggest debtors in the world are governments. It’s not zero sum. It creates winners and losers.
Sorry for the pedantry: zero sum means it creates winners and losers, because you can only give someone more by taking it away from someone else. “Not a zero sum” means you can create winners only, because you can generate value to give someone without taking it away from anyone else. Economy is never zero sum: a bad economy is bad for most, and a good economy is good for most. Cronies exploit poor people in both good and bad economic circumstances.
This is the best answer. At just 2% inflation, by the time you’re paying off that 30-year bond, it only costs 50%. Government can stay in perpetual debt, pumping money into the private economy, and inflation effectively pays off the debt.
yes, but this also assumes growth. you can have poor or no growth, and that introduce other problems with government debt.
and governments are not ‘debtors’ they hold debt, yes, but they can also manipulate the economy directly through politics and policy. your average person in debt, can’t do that.
another fatal mistake people make is thinking government debt, business debt, and personal debt, are all the same. they aren’t. they all have different rules and different mechanisms for how they are assessed and businesses can do things people can’t.
Because money has no value except when its used. This is actually a problem for modern economies (in the us but it has global knock on effects) because a combination of things have caused investing to be like savings. taxs cuts, lack of regulation, individual retirement savings, etc. it all leads to “investing” in market funds which is basically dumb (passive) investing by which I mean is decisions are not being made on something being better than another. Which is the purpose of the market really. Its also why robust social services are good economically. It encourages the average person to spend in the present without concern for the future (ideally) which keeps money flowing which is what you want. Its kinda funny because countries will go ape trump over subsidizing an industry but things like universal healthcare is literally like subsidizing all industries. I knew people from europe working on contracts in the us who did most medical things in visits back home along with insurance that allowed them to deal with catastrophic things abroad. This worked because us position pay more in the us to deal with the medical expenses and retirement the individual needs to pay for.
Monetary theory is complex, and lots of stupid people want it to be simple.
Inflation is a measurement, for starters. it’s the change in the price of of something. the general inflation rate is a index measure, it’s not a true measure of inflation, let alone inflation of any one type of product or service.
prices always change, but generally price stability is good, we prefer price stability to price instability, because it’s predictable and allows us to plan for the future.
inflation is easy to understand if you stop thinking about it as piles of money, and think about it in terms of how people interact with each other. people don’t want to socialize with unpredictable people.
further, some inflation is good, some is bad. people like housing and stock price inflation, because they are investments, they don’t like inflation in food, fuel, and consumables because those are not investments, you can’t sell the food you ate to someone else, but you can sell your home or your stocks.
Monetary theory is complex, and lots of stupid people want it to be simple.
“<Complex subject> is complex, and lots of stupid people want it to be simple” applies to far too many subjects, and politicians tend to use that to manipulate voters when those subjects are societal.
