Concentrated Wealth Is Strangling Prosperity
evonomics.com
evonomics.com
For example, when you buy an over valued house with a mortgage, say during a housing bubble, it doesn't make sense for you to try and sell it later on for less than you originally "paid" (with your fancy loan). So you are going to hold onto it, waiting for the market to go "up", so that you can sell it to yet another person who takes out yet another loan to "pay" for this overpriced house. In the mean time, either you or some renter is busting their ass to pay the interest on that unnecessary loan. It's completely ordinary for people who who decided not too take a mortgage to get stuck paying the interest for someone who locked a house into debt.
This is completely straight forward but when I try to convey how absurd it is, a lot of common sense people look at me like I'm crazy. It's considered a financially "sound investment" to buy a house and try to sell it higher. Well what if I don't want to live in a world where everyone is just playing monopoly all the time? I feel like there are much more interesting and pressing things to do with our precious human time and energy than cater to these ridiculous cycles of debt.
And lot of people who take debt because it's so "smart" couldn't come up with an original exponential function if their life depended in it.
This creates a situation where the same $1 has less value to a poor person because it has interest paid attached, and $1 to a rich person will have interest/investment gained attached. It is that difference, as well as starting funds/wealth for investment, that creates the exponential growth for wealth and the enormous advantage wealth gives to market actors when inequality is high. Wealth grows at like O(n log n) or better, while poor wealth shrinks sometimes at less than O(1)
Combine that with rich people on average spending less of their overall wealth into the consumer economy (not just investments or hoarding it during down markets -- a problem that exacerbates crashes) and you have a system that will get much worse. Policy is failing currently at getting money to move to all parts of the economy and the velocity of money has fallen off a cliff and is in a freefall due to the hoarding/inequality that has grown since 2000 intensely [1].
To most people, the debt is just a magical number on a paper and means nothing to them so long as their daily activities remain unhindered. And indeed, if things go wrong what then? Same thing as rent vs. buying, you lose your place you file bankruptcy whatever. Makes no difference to the buyer.
The only conceivable alternative that you might like is not having to pay for your basic needs, but, that's not going to happen ever in a capitalist society. So good luck with that fantasy.
If there were no morts, you would have to amass wealth for a long time to be able to purchase a home, which means ur capital becomes tied and you cant invest. Mortgages increase the amount of circulating money enormously.
Everything is exponential in finance, both debts and house values. Also income and investment returns. The exponential nature of debt is not an argument against anything. Rental also has an exponential opportunity cost.
In the UK is that housing has become unaffordable for most of the population - precisely because mortgages made it possible to buy property as an investment.
At the same time the market has been deliberately starved of affordable housing as a matter of national policy.
So your point makes no sense. What are you going to do with capital while you're saving it for a property purchase? Keep it under a mattress?
In reality, without mortgages, there would be far more investment cash available, because the money would be out there doing something useful, not trapped and congealed inside a fixed asset.
> In the UK is that housing has become unaffordable for most of the population - precisely because mortgages made it possible to buy property as an investment.
Without going too deep, there is a problem with saying unaffordable. Are we talking about indigents? Or that the middle class 25-35 doesn't have the access to houses the previous generation had? They are very different propositions.
I would take for granted that mortgages raise the price of housing, simply because it helps foster demand more than supply. But it also means more houses are sold, which also means more houses are built. The goal is not to have cheap housing, is for the biggest amount of people getting housing, and banning mortgages will reduce both prices and people getting housing.
> At the same time the market has been deliberately starved of affordable housing as a matter of national policy.
I can't comment or debate about this for UK because I don't know what this is about. Any government that puts a policy to control what is built is likely going to have bad effects. It is true that luxury housing is providing higher returns than affordable in the U.S. In argentina its a bit different, due to historically no credit: basically the only buyers of new property in Argentina are investors, because those are the only ones that had the capital to purchase in advance. Hence for a decade, the market was flooded with cheap-construction rental homes. I expect the introduction of mortgages to create a market for long-term quality housing.
> So your point makes no sense. What are you going to do with capital while you're saving it for a property purchase? Keep it under a mattress?
Probably low-yield money funds if you are sophisticated. Home-owners are ill-advised to mortgages their home to invest in the stock market: using your capital to buy a home to invest in stocks is basically the same.
> In reality, without mortgages, there would be far more investment cash available, because the money would be out there doing something useful, not trapped and congealed inside a fixed asset.
If a man buys a house at 100k, his capital is now owned by the former seller, so the amount of capital in circulation is the same. The point is what happens when someone wants to buy a house: they have decades of saving money in low yields. This can be seen in Argentina again, as there is a mortgage boom, 30 year olds are making cash-down payment, even though market participation is almost non-existent. People were saving the cash in their mattresses.
And I should be clear that I'm really lamenting about something bigger, which is the tendency for "always defect" strategies to get normalized as "smart" in our collective economy's various prisoners' dilemmas. We suffer collectively because of it.
More concretely: right now because of how cheap, bad quality mortgages artificially inflated housing prices around 2008, and again today, and because of the stagnancy of wages, most people I know cannot afford to buy or rent without compromising their well-being significantly.
If "cheap" mortgages weren't so rampant, how would property values even have been able to inflate like they did? They wouldn't... it'd be a totally different market. I think home values would be much closer to their physical value, reflecting the state that they're in rather than some abstract, speculative potential value. There would be less incentive for speculators to hold on to them for the sake of "investing" and more reason for people to hold on to them for the sake of living in them.
Just where does that money circulate back to? Right now it circulates back to the most wealthy, those who this article is talking about, those who are usurping their feudal lordships right now.
Where I live, there is a housing trust that bars people from buying its houses to rent them, and protects houses from bubbles. When people want to sell the houses, they have to sell them through the trust, where the amount they could lose or gain from market fluctuations alone is capped at 25%. If they made improvements on the house, they are able to sell it at a higher value. The houses are significantly less than market value. And are much higher quality than rental properties.
There are several explanations to housing values being high today besides (and probably along) cheap credit. 1) 2008 crisis was devastating to construction and development rates in the U.S. and it hasn't caught up to demographic growth. That alone could cause a mid-long term increase in housing prices that can only subside if development outstrips demo-growth 2) There is a global effect of people moving to cities for jobs. Even if construction kept up, if people moved to the cities where its harder and more expensive to build, you would see wages lagging behind property prices, since the competition for both gets more fiercely concentrated. 3) There is a global effect of chinese money. Cities like vancouver and London are very aware that the influx of asian funds have fueled their local RE markets.
Also, the era of cheap credit is ending, and the fed is slowing increasing the rates. They might be risking a crisis if they just jumped the credit a few points up, so this process can also take quite a while.
> Where I live, there is a housing trust that bars people from buying its houses to rent them, and protects houses from bubbles. When people want to sell the houses, they have to sell them through the trust, where the amount they could lose or gain from market fluctuations alone is capped at 25%. If they made improvements on the house, they able to sell it at a higher value. The houses are significantly less than market value. And are much higher quality than rental properties.
Any restriction of use of a commodity will reduce its value. Naturally, if you only allowed a housing unit to be rented out, it will also be of less value that one that doesn't have that restriction. In terms of housing, that is an equivalent to a price control, so those measures will tend to lower investment and availability, to, finally, in the end, cause higher prices than they would otherwise. Rent control is one classic case of this effect.
Moreover, its not a scalable solution, and I'm fairly confident that it will show all the problems of trying to avoid market behavior: it might be hard to get in to the fund, it might end up causing a run in the case of a big down-turn where many people need to sell but the fund has overpromised, etc etc.
What you're describing sounds exactly like the housing market under the rule of cheap mortgages and speculative investment. People having a hard time getting in, people having a hard time getting out without going bankrupt, these are all exactly what happened in the "free" housing market during the last decade.
Anyway I don't understand how this program "avoids" market behavior. In your mind, is the free market somehow incomplete without a rentier class?
I don't see the same effects you mention. If we talk pre-2008, getting in was too easy. Post-2008, to 2012 the market had a typical rebound curve, those were all good times to jump in. Now its expensive again, which means demand has to subsidize and start balancing out with the supply.
In 2009 i used to say argentina RE prices were too high for the population, and that some crash should happen. 2017 and it hasn't happened: its possible house prices as they are now are here to stay for a long time.
> Anyway I don't understand how this program "avoids" market behavior.
It tries to set its own prices by means of insurance. By making a fund that caps wins and losses, it doesn't prevent them, it just distributes them differently. There is pervasiveness to the concept of "you can't beat the market": it means that if you are, you are absorbing some risk or cost you don't see.
i.e.: What if a crisis happened that lowered house prices 40% across the board: 100% of the community wants to sell in the fund, which has capped losses, and then buy property again, to make a neat 15%. Moroever if the market goes up, as soon as the market shows 25% improvement, there is a great incentive to sell, because your gains are capped. So when you are close to that limit, your biggest interest is to sell, specially if property taxes adjust to a standard different from the one the fund uses.
Not to mention that you have to pay the people managing this fund one way or another: their labor does not come free.
These are all risks and consequences that exist on that management style alone.
> In your mind, is the free market somehow incomplete without a rentier class?
Not at all. And in this fund case, the fund managers are the rentiers.
If you bought a house through the trust at $100k, but now it's market value is $300k, you would only be able to sell it for an additional 25% of the appreciation ($50k).
Im not saying its a bad idea, or uninteresting, but its definitely not going to be superior to the general market as it is (afaik).
We have a system that is set up based on exponential functions; and we know that most people will intuit linear.
It is very frustrating watching friends people take up a position on the wrong side of an exponential function because they live in the here and now. Doubly so trying that they don't realise how big a financial gap they are creating to where they could be.
I flat out don't believe that most (ordinary, no maths training) people taking on debt understand whether they are making a good or bad decision. If they make a good call, it is luck.
You are comparing amounts of money at different points in time without discounting them to their NPV. That is nonsensical. Ironically, if you go to get a mortgage at a bank, they sometimes use the same arguments to steer you to their preferred mortgage (look how much more you would pay in total at the end of the ride for option A vs option B, without take the time value of money into account).
With homes, it turns our places of respite into worrisome baggage.
What does this even mean?
People rely on math that they vaguely understand to govern their financial and economic relationships.
The darkest timeline is one in which the wealthy decide that the vast number of humans are unnecessary surplus to be eliminated, as the wealthy retreat into secure enclaves guarded by robot armies, leaving the rest to serve as slaves or to starve and die.
With ever bigger numbers of unemployed people's life going nowhere, that could change.
Starvation, elimination, or enslavement? Why would they bother. They'll probably be quite generous with the foodstamps -- you're less likely to act up if they toss you a tin of beans now and again, and they can bemoan the ungrateful idleness of today's youth.
The world however is not so dark, even at our worst.
Like most things, it depends where you are in the scheme of things.
I wouldn't.
I'd do what I do best, not what pays more.
At least his policies got what he wanted. He probably did love this country but didn't consider the consequences.
They do, they just spend it on buying things like factories, companies and real estate. This is usually called investing and will also get money back into the system since the things you buy when investing were built by workers as well.
Mortgages have a low interest rate in comparison to regular credit, so money that is not put on the mort and into the business economy is an exponential gain.
If the final goal were to reduce prices, you just need to pass a law that all housing is worth 1$ for an unprecedented successful policy.
It is always interesting to me how in Real Estate, people are intelectually sensitive to price increases: as if price increments were a sign of things going awry. More often than not its the opposite: job creation in a city raises rents which is a net good (i.e. SF and Seattle). Or people moving out of their parents home earlier.
It is senseless to look at the price of one thing and focus on that as a measure of well-being. After all, a man in the 20's would look at our salaries and say we are all filthy rich.
One of those things is not like the others. Inflating the value of real estate is one of the ways "people with lots of money" use to 1. tax wealth creation, and 2. devalue the wealth of "people without lots of money".
However there are risks with too much wealth tied up in too small a demographic group. It reduces the diversity among those investing, thus reducing the diversity of investments. This could distort economic development and leave productive opportunities unexplored. It could also lead to political capture by this monied elite.
In the limit that means they end up controlling all the things.
You would somehow need "little people" wealth growth (in aggregate) to outstrip "rich people" wealth growth for this not to happen, but it can't because the little people have to spend non-negligible fractions (or all of) their income to stay afloat. Basically, the rich win by not actually spending (proportionally) much money.
Thinking of it in exponentials, assuming you invest everything you don't consume, normal people have a drag on their exponential coefficient which is their cost of living. They also tend to invest less efficiently in aggregate due to not having wealth managers and specialised tax consultants and so on.
In an investment race, highest exponent wins. There is a confounding factor of population growth though.
What the economy needs is for massive wealth accrual to be met with equally massive backpressure. Allowing for much higher taxes at the very high end of income/investment returns acts as a kind of non-Newtonian fluid in the flow of wealth, keeping it all from going away from those who haven't even had the opportunity to get some yet.
What a catholic idea, that people should commiserate and suffer for the better of others.
Thankfully human kind is resourceful and since time immemorial will always weasel out of situations they dont agree with.
To the very least it would reduce wages and increase stock granting, which making them more obscure it has other negative effects.
Where difference investment options shine is, as you mention, being able to skirt taxes, or have access to information, or state regulation.
In the tech sector, the requirement of being an accredited investor to be able to invest in startups has the following effects: increases investment returns for investors. Reduce amount of founders and their payoff and lowers wages because they cant trade their stock freely, showing captivity.
On taxes: it is dreamed that better tax policy might nake the rich pay what they owe. But that mindset is what got us here. Id say lower the taxes on the common, and that might not solve it, but would vastly reduce the exponentiality.
On information: in this I part with milton and say that all income of any kind should be public. Society will take a hit on privacy, but this information is too valuable to hide. Knowing that everyone woyld not need to speculate on how the rich make money, and given freedom might even compete with them in the same assets.
Game is rigged, unfortunately, by the people that think they are fixing it.
Incidentally, secondhand markets work the same way. When you have no possibility for a secondhand market you get a race to the bottom in value. Need evidence? See software markets, compare physical video game sales vs. mobile app store video game sales. The alternative we got? Consumable nothing. People convinced to spend money on literally nothing. Paying for the privilege to flip bits on a flash drive. Easily one of the worst markets to ever exist.
So yeah, stock sales are good for the initial investment needs.
That is wrong. The value would be the NPV of all future income from those stocks. Being able to sell them easily increases the value a bit because of the increased flexibility, but the major source of the value of an investment is the stream of future income.
As an example, Warren Buffet has no intention of ever selling his stake in Coca-Cola, yet he is getting more than his original investment in dividends each year. Are you going to argue that his investment would be worthless if he weren't able to share his shares (which wouldn't change anything for him, because he never intends to sell them)?
The best reason I've heard is that is leads to violence. People (specifically men) can't cope with knowing they can never succeed in the competitive race to be the richest so they turn to other ways to gain power - like intimidating and beating people. But that seems to be more the fault of those individuals not the people they're jealous of. Maybe we should educate kids to not feel jealous of rich people and that would solve the problem.
I'd argue that peasants had more political power than wealth back then. Peasants uprisings were a thing. Rulers had to work with that by either crushing them or giving them a wee better treatment. Yet they didn't have any wealth. Once peasants got some wealth thanks to industrial revolution, they soon broke into wider political scene.