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Author Topic: I don't understand neoliberal economics: low-level inflationary hoarding  (Read 1449 times)
tacotime
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January 11, 2012, 12:07:35 AM
 #1

Okay, there's something I've been struggling to make sense of with neoliberal economic policy for the past several months that I'm sure some smart economist must have addressed in more detail.

I understand the low level theory as this: maintaining a small amount of annual inflation (2-5%) through bonds at the central bank prevents deflationary and inflationary crisis, creates the incentive to spend cash and should cause perpetual economic prosperity while increasing income inequality.

Okay, that's fine, but the main problem I've never been able to comprehend:
1. Entities with more disposable income will no doubt buy bonds or better yielding equities, which will result in, overtime, the accumulation of wealth in an exponential fashion in these entities.
2. Entities with less disposable income will never benefit from this as they can not invest or can only invest less, with the bulk of their income being spent on necessities.
3. Eventually, just by having progressively saved money, the wealthy entities will accumulate exponentially more wealth than the non-wealthy individuals, likely forcing the non-wealthy individuals into severe debt and eventually poverty.

I did some basic calculations based on the current percent increases in the wealth of the top 1% of individuals in the year 2011, and it appears that by the year 2100 that 99% of all the world's currency (which we might assume to be related to their wealth) will exist in the hands of that 1%.  At that rate of increase, it's easy to see that within a short time we'd reach 0.1% with 99% of the wealth, then 0.01%, and so on.

I made up the name "low-level inflationary hoarding" because I don't know how else to call this, though someone probably has a better name for it.  It's seems just an insidious and slow-working form of rapid inflation that increases the wealth of the central players in the system, similarly to countries in which absurdly high inflation rates are common which eventually strip the middle and lower class of their savings and reward the highest of the higher class (who usually have possession of inflation-proof goods or bonds that the lower classes can not afford).  The hoarding refers to the possession of financial attributes that are investments that people who are lower class can generally not afford.

tl;dr: I don't understand how long term, small amounts of perpetual inflation can, over time, be any more successful of an economic policy as compared to short term, large amounts of perpetual inflation.  The latter of which I refer to as short term because the government usually collapses before the policy could be considered long term.

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January 11, 2012, 11:01:31 AM
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There is an assumption that all saved money now is for spending at a later time, and this is the basic of modern economic theories

One single person might have very high incentive to accumulate wealth throughout his entire life (because he was so poor before), but his son/daughter might not, and his grandson/granddaughter might not, wealth seldom last more than 3 generations

What kind of people have the incentive to accumulate wealth across many generations, and why do they have such incentive?

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January 11, 2012, 11:10:48 AM
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I think its because you are ignoring taxation and government spending. Usually, the richer would pay more taxes, and through government spending that money, as well as newly created money -in so far the government still creates it-, would become available for anyone to compete for. In theory.  In reality of course, the super rich will do anything they can to limit taxes and government spending, and/or direct the government spending to themselves for the very reason you bring up.

lonelyminer (Peter Šurda)
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January 11, 2012, 12:52:22 PM
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I think you're mixing several things:
  • the anticyclical policy of the central bank (or equivalent)
  • promotion of growth through monetary expansion
  • wealth inequality
  • redistribution of wealth

Even if you have an inflationary currency, unless there are restrictions on the market, even poor people can still save by investing into fungible liquid commodities such as gold.

As Ludwig von Mises said, the changes in the supply of money serve no social purpose. The only thing they do is redistribute wealth.
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January 13, 2012, 10:00:36 PM
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Yeah, I'm not sure what currency inflation has to do with investing in assets with interest returns. Such assets would also be available in a deflationary environment, and the idea that money makes more money, and thus rich will become richer faster than poor people will happen pretty much in any style of economy. Though wealthy people are also wealthy because of their knowledge about business and finances, not just because they have money, and as johnyj pointed out, wealth doesn't last through many generations. Stupid trust fund babies can quickly squander it all.

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January 14, 2012, 04:09:41 PM
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There is an assumption that all saved money now is for spending at a later time, and this is the basic of modern economic theories

One single person might have very high incentive to accumulate wealth throughout his entire life (because he was so poor before), but his son/daughter might not, and his grandson/granddaughter might not, wealth seldom last more than 3 generations

What kind of people have the incentive to accumulate wealth across many generations, and why do they have such incentive?

This is coming up a lot in this thread.  In any case:
Of all the persons I know coming from highly wealthy families, I would estimate that only 10-20% will end up in low-paying jobs or unemployed, consuming what wealth their parents have given to them.  The rest typically follow in their parents footsteps: I have one friend who is an executive, and all 5 of his children are either working in high tier finance, are executives themselves, or are high ranking government officials.  Of the low income families I know, I would say it's closer to 80% of the progeny failing to exceed the earning potential of their parents.  Unless someone has a lot of hard data on thousands of families, I really find this all hard to believe, that rich parents are unlikely to produce rich offspring.

The fact of the matter is, the more money you have as a parent, the easier it is to send your child to a private school for K-12, hire nannies and educators to ensure an upbringing that produces a well-functioning adult, and provide the financial means to enter Ivy league universities (not to mention social networking connections the parents have).

Push this further to corporate entities.  Ford and GE have been around for extremely long amounts of time, and many financial companies even longer (Bear Stearns: 1923, Goldman Sachs: 1869).  Their durations of existing are quickly surpasses those of humans, and their wealth exponentially increasing.

Quote
I think its because you are ignoring taxation and government spending. Usually, the richer would pay more taxes, and through government spending that money, as well as newly created money -in so far the government still creates it-, would become available for anyone to compete for. In theory.  In reality of course, the super rich will do anything they can to limit taxes and government spending, and/or direct the government spending to themselves for the very reason you bring up.
Well, yeah.  I think the concentration of wealth causes the system to run increasingly less efficiently due to a more more concentrated influence over it.

Quote
I think you're mixing several things:
the anticyclical policy of the central bank (or equivalent)
promotion of growth through monetary expansion
wealth inequality
redistribution of wealth
They're not related to one another?  Sure wealth inequality's exponential increase is related to exponential forms of investment.

Quote
Even if you have an inflationary currency, unless there are restrictions on the market, even poor people can still save by investing into fungible liquid commodities such as gold.

As Ludwig von Mises said, the changes in the supply of money serve no social purpose. The only thing they do is redistribute wealth.
Poor people can still invest, yes, but the amount of money they have to invest relative to a rich person is minute.  Let's take a CEO who can invest $750,000 a year and a labourer who can invest $10,000 a year.  After a ten year period in investment into equities returning 3% annually, the CEO will have accumulated $732,000 in capital gains while the labourer will have accumulated $14,600.  Divide these by one another; at the end of the day, the CEO is saving 50 times as much and is making 50 times the amount of capital gain.  The same gap still remains.  But keeping it mind also that investment returns for persons with larger amount of wealth are often higher due to better management, there is no real chance for the labourer to catch up.

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Yeah, I'm not sure what currency inflation has to do with investing in assets with interest returns.
Bonds don't have a lot to do with the inflation of a currency supply?  At the end of the day, to issue the amount of bond and its return the government must print exponentially more currency, I had thought.

Quote
Such assets would also be available in a deflationary environment, and the idea that money makes more money, and thus rich will become richer faster than poor people will happen pretty much in any style of economy. Though wealthy people are also wealthy because of their knowledge about business and finances, not just because they have money, and as johnyj pointed out, wealth doesn't last through many generations. Stupid trust fund babies can quickly squander it all.
They can, but my personal experience is that they do not.  Taxation is supposed to (as far as I can tell) allow for some wealth redistribution, because it pulls more money from the rich than the poor and then redistributes it, but every rich person I know does not pay very much in taxes due to the creative and perfectly legal assistance of their accountants.  As wealth accumulation increases, the abuses of the government's ability to tax the wealthier classes will diminish because their influence in the operation of the government becomes that much larger.  All I really have concern about is the inefficiency of the system (making it non-competitive with other countries whose governments and tax make greater investment in their human resources, like Germany) and it's potential for causing social arrest among the increasingly marginalized and debt-ridden lower segments of society.  I think the decrease of federal income tax was one of the worst things to happen to the United States (though I favour diminished corporate tax).

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johnyj
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January 16, 2012, 03:43:00 PM
 #7


This is coming up a lot in this thread.  In any case:
Of all the persons I know coming from highly wealthy families, I would estimate that only 10-20% will end up in low-paying jobs or unemployed, consuming what wealth their parents have given to them.  The rest typically follow in their parents footsteps: I have one friend who is an executive, and all 5 of his children are either working in high tier finance, are executives themselves, or are high ranking government officials.  Of the low income families I know, I would say it's closer to 80% of the progeny failing to exceed the earning potential of their parents.  Unless someone has a lot of hard data on thousands of families, I really find this all hard to believe, that rich parents are unlikely to produce rich offspring.

The fact of the matter is, the more money you have as a parent, the easier it is to send your child to a private school for K-12, hire nannies and educators to ensure an upbringing that produces a well-functioning adult, and provide the financial means to enter Ivy league universities (not to mention social networking connections the parents have).

Push this further to corporate entities.  Ford and GE have been around for extremely long amounts of time, and many financial companies even longer (Bear Stearns: 1923, Goldman Sachs: 1869).  Their durations of existing are quickly surpasses those of humans, and their wealth exponentially increasing.


Corporations maybe last longer, since they can be lead by different people who have the same high incentive, and there will always be new managers full of incentive

In my experience, no matter how good background, education and social network a person have, if he grow up with almost every need fulfilled, he seldom can pass his parents in achievements, since lacking of incentive

No need to get data for thousands of families, just look through all the people in the fobes 500 list and check if any of them have a even richer children

Banking families are exception, maybe due to the special position of bank or special character of Jewish people, it seems they have very high incentive for accumulating money generation after generation

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