Comment by roenxi | Hacker News Reader

Comment by roenxi | Hacker News Reader

It is worth reflecting that, if Grace happened to be have a world outlook that was a smidge more venal and materialist, she wouldn't have been able to do what she did. This is because dying with $7 million in savings means that she could have spent about $7 million more on enjoying herself in life.

I completely agree with her apparent outlook, and would rather have security and the pride of knowing I'd given a lot more to my fellows than I've taken back. And if everyone thought this way then society would be a lot better about preserving and growing what we have.

However, I've met countless people who behave like the executive in the opening paragraph not because they have 'bad behaviors', but precisely because they are clever and in practice wanted to maximise money spent/personal resources consumed. I doubt they would word that as harshly as I have, but the implicit meaning behind the behavior is very clear.

Now, if you start with a value proposition that the purpose of the economy is to maximise the resources available for individual consumption, it is actually quite hard to argue for dying with savings. The families who try to maintain inter-generational family wealth actually cop a fair bit of flack socially (in times of stress, they seem to near inevitably get branded 'hoarders', and times of extreme stress they have their wealth confiscated).

Basically, I like the argument and the value structure it comes from - but there are other views of the situation that are reasonable and deserve mention.

EDIT Fun fact, apparently $7 million gets you very close to the top 1% by wealth [1]. So technically, the sort of people who want "the 1%" to do more have people like Grace in their sights. We all know they don't want that, but it shows the normal attitude to wealth and savings imo.

[1] https://www.investopedia.com/articles/personal-finance/05061...

Consider the role of luck and risk. If you go to Vegas and gamble, your returns are pretty much luck. But for the casino, the quantity of bets makes their profits a virtual mathematical certainty, even though the outcome of each bet is luck.

Transferring this idea to the stock market, outcomes from an individual stock have a high degree of luck, but an investment in an index of stocks reduce the luck factor by quite a bit and move towards mathematical inevitability.

the central limit theorem only applies to uncorrelated random variables.

Are you sure about that? The stock market is not a mathematically defined process in the long run. It is still a gamble.

Let's say you are investing in T-bonds that generates a guaranteed 5% + inflation for 50 years. The lifetime of the US is, say, 500 years. After the lifetime of the US, the value of the USD drops by 100%.

So, yes, it is a good deal as long as it works. Some people are going to live 95 years and experience the stability and rewards of the T-bonds. Some people are going to invest for 10 years and lose it all. Some people are going to invest for 50 years and lose it all. Worse, if they don't diversify they'll be at an age where they can't generate wealth again (old).

You'll need a model of the USA lifetime to be able to determine the real returns + risks of the stable mutual funds.

There is no such thing as "compounding interest". Wealth doesn't compound like an e function. You are making money off someone else either "legitimately" by getting their work in exchange for your capital/risk. Or you are making money on a big, very long "ponzi scheme" known as "most world governments".

It is not a Ponzi scheme if the returns do not exceed actual economic gains and taxes by which they are paid. Please do not misuse words for a libertarian strawman. Of course these bonds do drain money and other resources from economy so you are profiting of work (and taxes) of others. In a much more diffuse way than say dividend stocks or futures.

The treasury bond is essentially a low return loan to the government, expected to be paid by economy via taxation and economic growth. If you do not invest in bonds you are taxed the same as someone who does. (Mostly.)

Governments can and do default on loans, but more rarely than companies. The other form is by adjusting interest rate on the bonds.

Monetarily sovereign Governments (US, UK, Japan, Canada, Australia, etc. but not e.g any Euro countries) never default on bonds/securities in their own currency.

(Well, technically they could choose to, but only out of incompetence or malice, never by necessity.)

Never say never. That they have been too big to fail is currently a fact.

Historically, monarch bonds which are a precursor to government bonds have defaulted. As have bonds of weak countries in severe crisis. (Argentina comes to mind.) It is a last resort of course.

None of the countries you mentioned, not even China, are economically independent. Thus when one falls, the others will feel it. Monetary policy alone won't work if you have to combat huge inflation or deflation, it has been shown in past crises. (Especially US ones.)

No, actually never. The key words being ‘non-convertible currency’ (i.e. no longer having the artificial limitations of gold standard) and ‘in their own currency’.

For example, my country’s federal Government can never run out of Australian dollars (we own the central bank!). But if I remember correctly, Argentina has a great deal of debt (like a lot of developing countries) denominated in foreign currencies. They can absolutely be forced to default on that.

The Eurozone basically all use a currency they can’t control, so have similar problems if they don’t have a big enough trade surplus to compensate (like Germany does). Those problems were predicted from the very earliest days of a common currency being discussed, like by the great economist Wynne Godley in 1992 (London Review of Books, November issue if I recall). He wrote a great textbook on monetary economics in 2006 with Mark Lavoie which discusses this kind of thing.

Inflation and deflation are a different issue, but can both be better controlled through fiscal measures (The monetarists’ fantasy that you can control everything just with interest rates is definitely wrong. It’s way too blunt a tool for the job).

1. Never is incorrect, lots of sovereign nations have defaulted.

2. A soft default is still a default for the investor

3. I’m confused by your characterisation of the US as a sovereign country vs the EU - they are both very similar federal groupings of states, just at different points on their lifetimes. US states have defaulted and some are at risk if it now.

Monetarily sovereign nation. The US Federal Government has a central bank that is the sole issuer of US dollars. They cannot run out of US dollars, ever. They also have a federal fiscal capability, which redistributes money around to lessen imbalances between states with stronger economies and states with weaker ones. The Federal Government can and should stop them from defaulting! To not do so is voluntary.

The US became monetarily sovereign when they removed the unnecessary artificial constraint of the gold standard after Bretton Woods fell apart (as all gold standards do eventually) and floated their exchange rate.

In comparison, Greece, Italy, Portugal, Spain, France, etc. do not have central bank that can issue Euros. So they cannot issue risk-free debt, like the US, UK, Australia, NZ, Japan, etc. can. The EU does have a central bank, but doesn't have any federal fiscal function to reduce imbalances between the member states (self-imposed, because politics), and the central bank is not allowed to buy bonds directly from member states (because politics) although did eventually have to start buying it up on the secondary market. But mostly the only options of the weaker member states in a crisis are austerity, which leads to unemployment, and eventually contraction and default.

They cannot run out of US dollars, ever.

I hoped point 2 would make it clear I think this a specious argument. A soft default (what you espouse when you say they can’t run out of dollars) is just a default by another name. If they truly can’t run out of dollars, why bother with taxes at all - just keep printing dollars? A soft default is arguably more pernicious than simply defaulting - it hurts future generations as well as the present.

The EU has a central bank, engages in QE, sets interest rates etc, and has the same problems with inequality as any other large super-state like the US has. It also redistributes funds to poorer regions. There are clear differences, but also striking parallels with the early US. The states within it have chosen to subsume their economic identity within a larger bloc, they have the same ability to print Euros as a group as the united states (and have done so).

Austerity was a political choice, imposed by the troika, it is not the only possible solution. Just to take one example, the EU could have engaged in more QE (or another variant of money printing), in order to fund Greece debt, but it was not judged politically expedient in Germany to do so.

"Soft default" is a completely meaningless term used only by "hard" money enthusiasts–which apparently means gold and now distributed computer games ledgers.

The reality is there is no such thing as a "soft default," there is just an elastic money supply. At what level of elasticity does it stop being normal balance sheet expansion and start being "soft default?"

I find it helpful when discussing literally quantifiable subjects like sovereign accounting, to stick to terms that can be meaningfully defined. Those who do not are being ignorant or dishonest.

At what level of elasticity does it stop being normal balance sheet expansion and start being "soft default?"

A flexible money supply and low, controlled inflation are good. Using inflation as a way of avoiding debts and obligations is not good (and yet so tempting that rulers have attempted to do so throughout history, with disastrous results). Doesn’t really matter what you choose to call it, but money is not infinitely elastic, and high inflation has nasty consequences.

Nobody said money is infinitely elastic, it observably isn't. It's arbitrarily elastic. Default "hard," "soft," or "gooey" implies reneging on an agreement. The Federal Reserve's agreement with its primary currency user requires maximum employment, stable prices, and moderate long-term interest rates. It also promises to pay you dollars for your dollars.

More importantly, the vast majority of money used by citizens and thus that can have an effect on inflation (which is caused by too much money chasing too few goods and services) isn't controlled by the Federal Government or the Federal Reserve. It's created ex nihilo as deposits in privately owned licensed banks. Is a bank "soft" defaulting on its depositors every time it creates a mortgage which results in the creation of new deposits, often in the amounts thousands of times larger than the typical depositor's entire account?

They cannot run out of US dollars, ever.

This implies an infinitely elastic money supply, where creating it has no impact on assets prices or inflation. The high inflation caused by that attitude would be a violation of the implicit contract with creditors and citizens.

The money supply created by external banks is still controlled by the government indirectly via various levers (interest rates, buying bonds, reserve requirements etc).

Defaults come in all shapes and sizes - most defaults are not a straightforward loss of all money but negotiated haircut(s) of some kind (see greece defaults rercently), similar to the gradual loss of spending power caused by inflating away debt. Inflating away debt is preferred by governments precisely because it is so hard to calibrate and nobody really notices it, but it is a dangerous game when taken to extremes and taken for granted (as the parent advocated).

Taxes are really important, even if they don’t really ‘finance’ monetarily sovereign Governments at all. From a macro perspective, it’s basically as if taxation destroys money and new money appears when they spend (unlike private bank accounts, where money transferred between them still stays in the economy). Of course, it looks like taxes fund spending because of the accounting involved (because it actually did in gold standard days, and things are mostly recorded in the same way just because that’s what people have always done) and various policy, etc.

That’s why the idea of a ‘soft default’ doesn’t really exist in the modern economy.

Basically, taxes are the main anti-inflationary mechanism that the economy has. The Government needs to spend money (and the private sector really needs them to spend, because in the modern economy we can’t create new money without creating debt - only the Government can do that), but if they spent without taxing aggregate demand would be way too high and you’d get inflation.

The Government doesn’t need your money at all, but they do need the private sector to not have it and spend it. Some economists looking at these kind of monetary issues call that ‘fiscal space’.

Secondly, you need taxation to have a stable currency, because it creates a baseline demand. Without a population of people required to pay taxes in a currency, it may become more attractive to the private sector to switch to a different currency.

Third, taxes are useful for encouraging (by tax breaks) or discouraging certain activities (by taxing them more). And finally, taxes can serve a redistributive purpose if you have a progressive system, reducing the financial assets of the wealthy somewhat while balancing it out a bit with spending.

By the way, you still haven’t understood what I mean about the EU...

Russia defaulted on ruble denominated debt in 1998. Sometimes default is less harmful in the long run than inflation.

I’m not sure why you are getting downvoted. People probably don’t understand and feel they are correct?

The governments can’t default on loans nominated by their currencies.

Their currencies might dip 100% though.

The way modern money actually works is completely alien to what most people believe (and those beliefs are reasonable based on their limited exposure to sovereign finances). Nobody likes learning that they are completely wildly wrong and ignorant about something they thought they understood perfectly and so responses are seldom positive or, sadly, constructive.

The US defaulted on the gold bonds in the 1930's.

The US wasn't monetarily sovereign then, they had chosen unnecessarily to tie their money to a commodity. It wasn't surprising, gold standards always fail eventually. A gold standard doesn't actually prevent inflation, and when inflation comes it's impossible to hold the peg.

Imagine you invested all of your retirement savings into "the index" a week before black Friday and then describe how the results are mathematically inevitable.

That's twisting some assumptions of the comparison. The comparison was to casinos, which do not bet decades of profits on a single day's gambling. The equivalent would be investing in your index every payday for decades, not suddenly moving it all at once. That's where the mathematical near inevitability comes from. You aren't betting on one day, one spin of the wheel, you're betting on a general trend across ten thousand spins/days.

Sounds like you need to meet Bob, the world's worst market timer: http://awealthofcommonsense.com/2014/02/worlds-worst-market-...

As I'm sure you know, allocating your entire savings into a single asset at a single point in time is probably the worst possible strategy. Compare it to slowly shifting your savings allocation from cash to the same single asset gradually and continuously over the course of years. In the latter case, sure you get the Black Friday loss, but you also get the Golden Monday buying opportunity. Since nobody can reliably time the market, this is about as good as an unsophisticated person can do. And those who have enough money to pursue a more sophisticated strategy don't need a hacker news commenter telling them about allocation strategies.

> because dying with $7 million in savings means that she could have spent about $7 million more on enjoying herself in life

The point of much of the article is that dying with $7 million in savings means that she could have instead spent about $7 million more on enjoying herself, not in life, but on the day before she died. She probably couldn't have even enjoyed children and a car "in life".

And if everyone thought this way then society would be a lot better about preserving and growing what we have.

The Paradox of Thrift says that the economy would actually shrink if everyone saved to such an extent, and people would have less overall with time. Even Hayek remarked that individuals can save, not an entire country.

Well, sure the economy would shrink, but that is the point. There would be less demand for consumer goods, because preservation implies less consumption.

Imagine a pretend happyland where everyone owned their own home and had a stockpile of 30 years of food. They change their usual work week to take Mondays off and sit comfortably at home. 20% of the economy literally disappears overnight. It isn't obvious that the anyone would be suffering.

The reason the economy shrinking is so terrible is because people generally live hand-to-mouth. If you have enough resources stockpiled to last you the rest of your lifetime, you technically no longer need an economy. It is still nice to have and some resources can't actually be stockpiled (eg, a doctor's time) so I wouldn't advise doing without it, but the economy is mostly important because people don't stockpile resources.

There seems to be a feeling that we should not stockpile resources because the economy is important. That line of thinking is very popular, but imo precisely backwards. Links the right things in the wrong order. Bit of a non-sequiter, but that thinking is why governments and central banks keep printing money.

All this is an interesting but philosophical point. People, in the main, consume everything they have available to them and then work to earn more.

EDIT It is notable that if no-one borrows then by definition no-one can make money by lending money. Again, although this is radical compared to what we do now, it isn't actually obvious what the problem would be. Again, it isn't advised because borrowing money for the purpose of investment is a source of fantastic economic efficiencies. The issue is we all know there is borrowing going on to fund consumption. That isn't a good idea, although the cost is carried by the people responsible so I have no beef with it happening.

Let’s take one vertical that people clearly need: food.

Sure there’s non perishable food. But a lot of the food people eat is perishable. They have to keep buying it.

Who is going to source the food if no one pays money to buy it? How will they pay for the operations to get the food?

Now apply this reasoning to other verticals. In many fields, the investments lead to actual improvements in technology, and increasing automation and productivity.

If everyone sits at home that only works if nothing ever breaks and no one needs improvements and technology. We’d still be using gas lamps if no one built electric stations etc.

About debt you can watch this: https://m.youtube.com/watch?v=PHe0bXAIuk0

Yes except that it is not black and white, working or not working. There could be a real case made for working less and directing efforts towards technology improvements that result in less environmental damage. To me, it does not make any sense to think in absolutes.

Except, I'm sure grace DID spend money on food.

Additionally, grace's savings, not spending money on things she did not need, increases net savings and decreases the cost of debt for those wishing to access her capital to invest in things they desire.

If grace went further still and didn't just passively SAVE her money, but actively invested it in things that made a positive contribution or spent that money only on things which made her desired world happen while discriminating against goods and businesses that made the world worse, either to fulfill her own desires for a better world or investing in such for others, she'd actively be choosing to use that money to build up capital in areas of the economy and reward sectors that supplied those things, lowering the cost of supply, and potentially creating employment in those sectors.

Either way, there are generally better things to do than consuming for the sake of consuming. And its primarily not about spending or not spending, but choosing where to spend and choosing where to invest, for an economy that keeps everyone employed but produces nothing of value (or actively produces harmful things) is not an economy anyone should be aiming for.

If we are so far down the path that we are advocating spending and consumption merely for the sake of spending and consumption to keep the economy turning over, then surely it would be better by far to advocate conscious directed spending and investment, rather than consumption.

I don't know - I can imagine that instead of consuming people spend money on investment - i.e. buying machinery etc. - companies produce machinery instead of consumer goods and the economy works as if nothing happened.

I agree, yet have a slightly different angle on this. I doubt she had any great need to enjoy herself more and I don't see her not spending her savings on herself as a terrible waste. I do think it was likely a waste though. She was uniquely positioned to steward her own capital having worked and saved her entire life to gain it. By giving it away to charity by bequest she's really just throwing that money to the wind in the hopes that whoever finds it will have the motviation to use it better than she could. If you want to change the world, roll up your sleeves and change it. Throwing money at someone else and dropping the mic is not a great way to go about it.

Further reading: https://www.ft.com/content/b66e3314-30fb-11e8-b5bf-23cb17fd1...

https://www.cnbc.com/2017/10/13/after-librarian-leaves-4-mil...

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