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Comment by Robotbeat | Hacker News Reader

Yeah, liquidity is really important. When liquidity runs out, you have people who are CAPABLE and WILLING to work being unable to find productive work. The way around it is to do odd jobs, DIY stuff they’re not good at because they have no choice, and barter (you see this increase during depressions), but this is way less efficient. So “printing money” (providing liquidity) actually increases productivity in the same way division of labor increases productivity. You can pay a plumber instead of taking 10 times longer and doing a poorer job, for instance.

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Does it actually address the source of the problem though? Illiquidity is caused by people hoarding wealth and not circulating it in the economy. Printing money gets more cash in the system but does not free up the hoarded wealth which is still locked up in assets that can remain unproductive. This seems like a temporary patch. If you take your example where there is not enough cash to pay a plumber, the cash is amassed in the accounts of a small number of people that are unable to generate enough work to keep all of the plumbers employed. You print more money to fix the supply problem but this immediately generates another; who gets the new cash first? We give it to institutions that will lend it so that we can reuse the existing system to vet people worthy of loans. So the credit worthy get access to new money and maybe they use it to do new construction or renovations that require plumbers. The plumbers, and others, now have income again. Problem solved? Well no, what about the original wealth that was hoarded? If it was kept as dollars it’s now depreciating but it’s likely that as soon as that started happening it would have been converted into another form that would retain its value. There are a limited set of assets that retain their value in face of inflation so we would see circulation in that part of the economy up until all of the original wealth had been converted into a stable form. It would still be driven by a small number of people though so the impact would be limited. What happens if you don’t continue to print money? I would think it would eventually find its way into one of these asset traps where it would then remain and we’d wind up right back at the start. So keep pumping new money in? But now it no longer affects the original wealth since that has been converted into other forms so the original problem will remain unsolved and you’ll need to keep the tap on forever so you don’t run out of money.

A better solution in my mind would have been to directly force the original wealth back into the system.

To the degree that printing money by reducing interest rates and perhaps causing a bit of inflation, it basically punishes hoarding of cash by taxing it at the inflation rate (plus the opportunity cost of having near zero nominal return in savings accounts). So that does force the original wealth into circulation. But it’s true that the Fed’s monetary stimulus is likely to be less effective at providing liquidity to individuals than direct fiscal stimulus like the stimulus checks people are getting. (Although it’s not all stimulating because many are using the money to pay off debts.)

Alternately, those who have already built a mechanism for capturing a portion of the printed money as profit can simply purchase non-productive assets and benefit from the rising prices.

https://advisor.morganstanley.com/liberty-group/articles/ins...

This is why we need to put the money into the right hands. It reminds me of trickle down economics. Instead of flooding one plant and hoping that you are pouring enough water to reach the entire farm field it would be more effective to just water every plant a little. It would require much less water overall.

I actually think liquidity issues arise mostly from entities failing to have cash on hand for the settling of debts that are due. Not due to hoarding wealth or refusing to invest it.

Those things are systemic issues related to other aspects of the machinery, particularly the incentives or mechanism of wealth distribution outside of money markets.

Difficulty of servicing debts is still addressed by both monetary (ie lowering interest rates) and fiscal (think direct checks to Americans) stimulus. In the latter case, it’s estimated roughly half the stimulus checks will go to paying down debt, not direct spending.

I don't know that the individual is a substantial figure in the patterns of distribution. Sure Suzy took out a $40k loan and is paycheck to paycheck because of it. But that's a very small fraction of the whole. And application of stimulus, while remedying some people's serviceability, gives others the basis to leverage up. As a whole, the system is highly circular, it's where you've got exuberantly large gravity that things start to bend and twist. And estimations in this system are designed to bust. Despite the fact that the whole system is manmade, we know very little. Estimates of oil prices 3 months in the future will be wrong, and nobody can actually predict the closing price of the indexes, let alone individual stocks, so to assume those estimates are even probable is ridiculous.

What I think we need to be considering is the highly concentrated nature of monolithic corporate capital and power. Like, for example, Amazon. The immeasurable value of the exchanges that took place globally for goods through Amazon. And Amazon tends to invest that wealth, which would be a net decrease in "capital entropy", while Amazon nets increased value despite the fact that they don't hold the capital. They do briefly inject a small sum of capital over a wide range of industries, though, like building materials, construction labor, engineering, and etc... But ultimately that money loses velocity, it doesn't have the momentum it needs because everything is so expensive now, and as a product most people opt to leverage.

On that latter part, as a miser of sorts, it's actually far more effective, even in the case of depreciating assets, to leverage. I could've been "educated" by now if I wasn't exceedingly scrupulous in avoiding usury. I spent many years of my life accumulating the relatively meager wealth I did collect and it's only put me at a disadvantage due to the nature of federal grants weighing personal holdings, from which I'm only able to draw in tax refunds, and only a fraction of what the ultimate costs will be it also puts me in a morally precarious position as far as other modes of welfare. That is to say you're dually (and quite possibly triply, with inflation) punished for choosing the "responsible" path of self-funding. To ossify that point, 0% interest increased sticker prices, so now buying big ticket goods comes with interest embedded.

Pretty sure illiquidity is not caused by wealth hoarding. It’s caused by taking out more debt than one can service, and people becoming scared to lend to others, because they’re worried they won’t be paid back. When everyone gets scared at once, things grind to a halt. And there’s a natural tendency while times are good to take out more and more debt, because you can use it to enhance your productivity.

EDIT: (so things naturally trend toward the overlevered state and a crunch)

Is that not just the other side of the same coin ? Short of centralized banking printing money there is no competition for wealthy just hording and letting time pass and demand grow. Kind of like bitcoin ;)

Eh the wealthy don’t hold onto stacks of cash, they immediately turn around and invest the vast majority of it in company equity, bonds, etc. Not sure if there’d be some sort of hoarding cash crunch in the absence of central banking, I haven’t studied the history there.

Can you explain how one "hoards money"? Like are they burying it in their backyard or stuffing it in their mattress? Do they have a McScrooge money pit?

I don't think it's a revelation that lots of ultra wealthy people hide money in offshore bank accounts, as well as other means.

I'd say many of them are literally hoarding it.

If it's in a bank account, it's not being hoarded. It's being loaned out and the people who get the loans are spending it on houses, businesses, automobiles, etc...

> If it's in a bank account, it's not being hoarded. It's being loaned out and the people who get the loans are spending it on houses, businesses, automobiles, etc.

This presupposes banks actually loan it out — which doesn't always happen, for example if lending officers are gun-shy or underwriting policies get too tight because senior management is gun-shy.

Banks aren't charities. It costs a good bit of money to keep deposits, on top of the interest expense. (deposit insurance, overhead, staff, etc...)

I think it's highly unlikely that these overseas banks that the rich use are doing nothing but sitting on their money and this practice accounts for all the purported "hoarding".

From the St. Louis Federal Reserve: "Lending growth slowed to zero during the 1990-91 and 2001 recessions but recovered after a few quarters. In contrast, during the Great Recession (2007-09), loan growth became strongly negative and remained so for almost four years."

https://research.stlouisfed.org/publications/economic-synops...

Yes, I understand that the growth of new loan originations experiences vicissitudes based on general economic conditions.

That's not my point.

My point is that loan growth slowing is not the rich hoarding all the money. They don't hoard. Hoarding is not only unprofitable, it costs money.

On a gold standard you can literally hoard it in a vault without losing value. Without inflation it’s actually not a terrible idea because you have high liquidity, you don’t have to sell assets to free up cash. You’d still buy assets but only the ones you actually needed or wanted rather than as a hedge against inflation.

What’s wrong with investing in productive machines (or productivity enhancements) as a hedge against inflation instead of just burying the talents and letting them go to waste?

It's true that capital begets more capital, but that's because anyone with money lends it back out seeking growth. Even if you have very little money and you put it in a bank account, you are lending that money to the bank for them to invest or lend out. Basically no one is just sitting on piles of physical cash, because if you did so you would lose value behind inflation.

Well we are talking about non inflationary systems compared to inflationary ones.

If money is just sitting around, and inflation is high, then it is losing value. The 'idle rich' are penalized.

Further, lower-income people often have debts, which is reduced (relatively) by inflation.

Ideally money wouldn't be just sitting around, and if proverbial piles of it are, perhaps we need to redistribute it more so that it's used more productively. This is why wealth (and not just income) taxes are being talked about more nowadays.

Lower-income people when they are borrowing, are borrowing at very high interest rates (credit cards or payday loans) and inflation doesn't help those situations at all.

The wealthy are systematically benefitting from low-interest loans being reduced in value by inflation -- in the form of corporate bonds and leveraged trading (shorts, forex, margin accounts).

Most rich are asset holders. No poor people are (by definition). Therefore higher inflation (to a point) is better for poorer people.

Tell that to the manual laborer working a long shift and swinging by a mcdonald's to get a double cheeseburger because there's no time to make food and who has the energy anyways. Oh also, that double cheeseburger is now $2.19 instead of $1.69

Inflation is good for you!

Assets keep up with inflation much better than working class wages.

That might be true today, but wasn't during the last high inflation period of the mid-60s to early-80s.

We're using two different definitions of "hoarding" wealth here.

The people you're disagreeing with consider buying up real-estate and company stock to be "hoarding" wealth because those assets could otherwise be put to productive use by someone else. People could otherwise live in those houses and become home-owners. Or the companies in question could get re-structured into smaller more efficient organizations during bankruptcy. It's hard for me to see the value of a real-estate investor buying his millionth acre of land when in earlier times multiple families could live on that land and call it home.

In contrast, you're assuming that any money being loaned to anyone is put to "productive use." And the flip-side of that is that the loan will come due some day. So accumulated wealth is used to accumulate more wealth from people who don't have any to begin with. In other words, the hoard of money is being used to extract rent and to hoard even more money. It's hard for me to see the value of that kind of system. It seems to lead to a continual serfdom as most people become renters of everything in their life.

"Further, lower-income people often have debts, which is reduced (relatively) by inflation."

It is, indeed, true that inflation can "melt away" existing debts by devaluing both the principal and the interest payments. There is historical precedent of large, debt fueled investments being inflated away:

"Anyone with debt benefitted as debts were inflated away to nothing under hyperinflation. For example a Pomeranian landowner took out a loan to purchase a property in February 1922 and repaid it in the autumn from the sale of less than half the crop of a potato field."[1]

However, this only occurs with fixed rate loans. Lower income people (US mortgage debt notwithstanding) do not have the opportunity to borrow at fixed terms and it would be very difficult and expensive to incur large debts, for any purpose, at fixed rates.

The floating rates that lower income people would, undoubtedly, borrow at would not protect them from inflation.

[1] https://www.stewartinvestors.com/all/insights/stap/hyperinfl...

I don't think I have ever gotten a floating rate loan in Germany. Are there specific countries or types of loans where these rates are common? Are you talking about credit cards?

Most of my experience is in the United States, where I live. In the US a "normal" mortgage typically has a fixed rate.

However, any kind of unsecured loan will have a floating rate. Certainly that includes all credit card debt and any kind of short term business financing like paypal offers.

Further, if you have a poor credit score it is likely that your car loan(s) will have a floating rate and that you will be aggressively steered into a floating rate mortgage (an "ARM"). This will be presented to you as a benefit in the form of lower monthly payments (for now).

In Romania most of the mortgage loans are floating rate, tracking the 6 month ROBOR (equivalent of EURIBOR).

Ironically the only market mechanism to force money back into the rest of the system is for interest rates to rise. If real interest rates sat at ~7% those with money would attempt to lend it and liquidate unproductive assets, those borrowing to purchase unproductive assets would be forced to sell. Productive, but high cost assets would come down in price (housing) due to lack of demand. For interest rates to rise, there will need to be a lack of liquidity at the current interest rate, many businesses are now dependent on artificially low interest rates and guaranteed liquidity.

Unfortunately we've built an economy which requires progressively lower interest rates to sustain. Rebalancing will be expensive ( see the interest rate increase in the run-up to '08 )

    the only market mechanism to force money back into the rest of the system is for interest rates to rise

Or a wealth tax.

Inflation is basically a wealth tax. Sort of.

One that hurts poor people more than wealthy - since wages are last to inflate. Additionally, wealthy people are still able to afford necessities during times of high inflation.

Only if the wealth is held as dollars or a depreciating asset. If it’s invested or converted to something of limited supply then it can be inflation proof. Too bad those options are out of reach for the poor.

We have wealth taxes. They are called property taxes and inheritance taxes.

Inheritance tax is easy to avoid and property is a very small proportion of the ultra-rich's assets.

The entire point of inflation is to force people to work harder to preserve their wealth. If there was say 5% inflation then companies would see greater than 5% interest rates on their loan and that means only the most productive companies actually get funding. By failing to create inflation the central banks are fueling the creation of zombie companies and unproductive investments. It's inherently injust yet we still see people rally against the inflation boogeyman as if it's a demon that is going to kill everyone.

I think this view of hoarding is wrong. Here is how I think about it:

You get money as compensation for goods or services you provide to other people. The money is a sort of "IOU note" from the rest of society.

If you never spend the money, you've chosen to never cash in the debt. You're essentially gifting that money to the world.

There are a lot of complex and dynamic systems at work in the economy, and it's easy to make good sounding arguments for and against anything. I find it helpful to think of the fundamentals.

It seems like lack of money is unlikely to cause liquidity issues rather than some other issue preventing money from circulating through the economy. Inflation actually solves the second problem rather than the first as it punishes those who hoard cash.

But it does so at the expense of those looking to borrow it productively. Wealth tax punishes hoarders without the collateral damage of preventing most from having sane mortgages.

That’s one side of the equation, but as always there are diminishing returns. Therefore, borrowing money should be mildly discouraged as ultra low interest rates results in a huge misallocation of resources.

That said, consistent low levels of inflation have minimal impact on borrowing as the future cash paying for the loan is discounted. In effect it simply forces a minimum annual loan repayment rate.

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