Research suggests that when the rich bank, the rest borrow

It's an interesting dynamic of the more reckless moving the market for everyone and harming not just themselves, but also others, and the potential link to more money being available for lending due to inequality is very interesting indeed, because it suggests a nasty negative cycle.

This is completely true. Another example, in NL, the gov removed “transfer tax” on first-home purchases in 2021. This led to an increase in housing prices, as the “savings” just helped people bid higher on houses.

The world and its economy are absurd.

Does anyone have a good source of this kind of data?

In some ways lower interest rates is actually better since higher home values mean you can spend more on amenities like high end kitchen and bathroom as a builder.

The issue comes when you start looking at sub-prime debtors like students. If you have a 300 bps risk premium for being an unreliable borrower but the interest rate for reliable creditors is only 2%, your risk premium is 150%, but if the reliable borrower rate was 6% then your risk premium is only 50%. Add to this the fact that refinancing student loans (issued by the government) causes them to lose benefits like the 0% interest pause we have right now. That means the government intervention has caused a market distortion: you can't fungibly exchange your loan for a refinanced one at the market rate but instead are stuck with the 5-8% rates from 5 years ago.

Government intervention also has other impacts: since you can't discharge student loans in bankruptcy, there's no incentive for universities to make students succeed or to discriminate admittance/cost by major (proxy for future earning power). That means we have a huge number of people stuck with high interest loans they can't discharge or refinance and useless degrees in majors that have 0 value to society. If you changed this to allow students to discharge student debt in bankruptcy and forced universities to assume the risk instead of the government, university incentives would be aligned with student incentives.

As wages go up, the money available for people to pay for housing goes up.

If a given city employs people and pays enough that 1 person earning an typical wage can afford $1k a month rent, then that's what rent will be. It won't be lower (because landlords will charge the most they can), but it won't be higher (people will move to another city - perhaps one with lower wages, but lower rent).

When we switched to a society where it was normal to have 2 incomes in a given house, the money available to pay for housing increased dramatically (towards $2k, but for families you'd have to remove things like childcare costs which would normally have been done by 1 person), and thus rents increase to the point where supply/demand returns to an equilibrium.

Now aside from rent, you could also buy. A house costs whatever the maintenence is, plus the interest cost of the mortgage (there's also the capital repayment part and the likelihood of the house increasing in value in the future)

Rents are also capped by this - if the cost of buying (including the maintenence) goes below renting, then people will buy. That means house prices are constrained by rental - if the cost of buying/owning house is too much, people will rent. Ultimately they to can always move out of the city and leave their job.

When interest rates went down, people could spent more on buying a house, which meant prices went up.

Imagine a couple that have a budget for $2k a month for housing. If interest rates were to double, mortgage costs would increase. That wouldn't change rents (which would still be $2k), but instead of a house costing say $800k (2k/month allowing 800k loan at 3% interest), instead people could only borrow say 400k. That means that houses go down to 400k, but still cost the same per month.

This is great for people with spare cash, as they can buy up those cheaper properties without having to pay the interest, and still get their $2k/month rent coming in.

It's no change for people who want to buy for $2k/month, that's what they can afford, and it's going to be roughly the same as what it would cost to rent.

It's terrible for people who want to sell and repay their equity, as the house price has suddenly halved. They bought it with an 800k loan, have repaid 10% of that, and owe 720k, now they can only sell for 400k. So they rent it out instead and rent somewhere else.

By constraining the supply of loans, first and foremost you’d be cutting out those who need it most. Unfortunately, that’s how risk markets work - the riskiest (also usually the poorest) get cut first.

The interest rate argument isn’t actually very grounded in fact - in order to save from refinancing, the rates have to have declined from where they were before. If rates stay flat, there is no benefits in refi - whether they stay flat at 5%, 3% or 10%, as long as the rates stay flat. However, borrowing at a lower rate is better because you end up putting more into the equity. If you borrow at zero percent, everything you pay in goes to reduce the principle and so long as the property doesn’t decline, you are building wealth.

This is why arguing to reduce the loan supply to me is very counterproductive. What we need is better education and fewer predatory lending practices. Things like payday loans, etc, are currently predatory. Those could be reformed to serve the purpose they were originally intended for (emergency money), but until that happens, things like that create the actual problem, not the loan supply itself.

If I can get that for $200/month for a new car for 3 years then hand it back, with just known costs of insurance and gas, that's valuable. I don't care what the cost of the car is, only what the cash flow is.

Sure, I could buy a car for $5k and hope that it's cheaper over the 3 years, hope it doesn't depreciate too much, and after 25 months (plus however many months to pay for the extra maintenance and servicing included in the first car) but I'm taking the extra risk. Maybe I'll come out on top, maybe I won't.

Interest rates have been at record lows for over a decade, but the cost of the basket of goods the typical person buys hasn't changed much.

Leasing companies can then sell their used rental cars at a higher price, which means they only have to finance the depreciation...which reduces the cost of leasing a car.

It's all swings and roundabouts

Governments can print money. And they can raise taxes (immediately upping their revenue). Those are their "assets". Much more reliable ones than the average business.

Now look at most businesses. What assets do they have? Second hand manufacturing equipment at best, basically scrap. And that's the companies that have at least some. What assets does Facebook have? A brand name is the main one, you can't resell that really... Lots of western companies are basically hollow.

I can't comment on the core point of the article, I'm just saying you're a lot safer with government debt than corporate...

Which is strange. You would expect if that was the case people to charge the government non-trivial amounts of interest. And yet, the interest rate the government spends on interest for a 20-year loan is 2.1% APR.

If this were true corporations would never become insolvent. The role of CDOs and CDSs in the 2008 crisis made it abundantly clear how corporate debt can be inflationary. But we knew that beforehand from previous crises in the 19th and early 20th century when unwinding corporate debt and restoring liquidity was handled (if at all) almost entirely in the smokey parlors of the private sector by titans like J. P. Morgan. See, e.g., https://en.wikipedia.org/wiki/Panic_of_1907 More generally, see Lords of Finance (https://en.wikipedia.org/wiki/Lords_of_Finance), an historical account of early 20th century international banking which swept up numerous history and economics awards. (It was coincidence that it was published amidst the 2008 crisis. IIRC nothing in the book mentions it except possibly a foreword.)

But I think the real point here is that when investments are dependent on others' debt and not on other types of returns, there's a whole system that is built on promoting debt, selling people on accepting debt…

i.e. companies have stopped borrowing money and instead fund themselves through issuing stock but strangely enough they do not sell the stock when they need it, they keep large portions in their own bank accounts. If companies and the rich are not borrowing, then either consumers or the government must borrow the money. Consumers take on mortgages to buy increasingly expensive houses but as 2008 has shown an overpriced house is a poor investment that drains productivity from the economy.

Please refrain from bashing the journalist. He is not making up his own economics, he's stating the obvious.

The article claims that savings by the rich is fueling both consumer debt and government debt, when in fact it's closer to the other way around. Government debt — monetary policies that inflate the money supply via government debt — is fueling profligate consumer spending with cheap consumer credit made available by easy-money policies.

The ignorance here is destructive.

We have made some progress.

You just listed the positives, without any the negatives, and without any sign of actually weighing one against the other.

I don't know if Amazon is a net social positive, but it certainly isn't obvious and the answer coudl very well be no despite the positives.

ps. I helped create Amazon.

Your logic seems highly suspect.

Also, the article seem to treats building a new road as an unalloyed good.

Which is what happened before 2008, when there was very little oversight in borrowing (e.g. NINJA loans). We know empirically that if the lenders are not obligated to make sure that the loans can be repayed, predatory lending will occur and cause social problems.

Some of these assets have a poorer counterparty who is getting access to that money in return for repayment + interest. Perversely, the more money is available in these assets, the lower the interest rate and so the more money these counterparties can borrow. This drives up the cost of physical assets being bought with this money, like homes, because the value of the home is dictated by the debt load a buyer can bear. Lower interest rates means you can support more debt, which means someone will take on more debt and outcompete you for that house.

The middle class uses this money to buy cars/houses which helps the 1% to increasing their savings, which they then invest a portion of into banks...

BUT like another comment discussed, a lot of this is going over seas. Right now this cycle is pushing US asset values higher, but at some point this will come crashing down, and the money that was invested in under inflated markets will be valued correctly/over valued.

At which point that money will flow back into the US.

Since there is a lot of cheap credit price stops constraining the demand side. You can get almost arbitrary large loan with arbitrary long timespan. This causes prices to rise. Houses seem like good investment so wealthy buy them restricting supply side, causing prices to rise even higher.

Rising prices make it impossible for most to save for the house. They have to take loans.

Now poor people who want house need to pay the inflated price + credit fees on top of that. Sellers see their assets rise in value, creditors see more customers and more revenue.

If there was no cheap credit then the prices wouldn't rise so much because nobody would be buying them.

Now, I don't know how true is all above but that seems to be the explanation of the issue I've seen many times.

I could argue that liberalization of global capital flows allowed significant foreign investment leading to an abnormally low interest rate regime, which is why everyone (rich and poor) has taken on more debt, and I guarantee you that the rich take on far more debt than the poor. But as the poor tend to have mostly human capital on their balance sheet while the rich have assets, it creates an appearance that the poor have net debt (which they do not) while the rich have net assets (which they do). In fact both the poor and rich are solvent -- have more assets than debt, but the assets of the poor are future wage earnings. Thus in any reduction of interest rates, the poor will disproportionately benefit over the rich and will take advantage of this to increase borrowing.

E.g. if you are rich then both your assets and your liabilities will grow in lockstep (at the macro level). But if you are poor, then your assets are your wages which do not grow in lockstep with interest rates. Thus a reduction of interest rates disproportionately helps the poor to borrow more but an increase disproportionately hurts their ability to borrow. These are just some of the interesting effects when you seriously look at debt-dynamics and interest regimes. But in no regime can you make a case that the mere existence of the rich somehow causes the poor to borrow.

Yet the reason for low interest rates and the fact that such low rates are responsible for both the behavior of the rich and poor are not covered in this piece. In fact it used to be the case that Rebecca's predecessors would bemoan the fact of how the poor were locked out of credit markets and thus unable to participate in the wealth-creating business of taking on debt to purchase long-lived assets, and thus they had to rent an apartment instead of being able to buy a house, or could not borrow to get a more reliable car on credit, etc. Now that those barriers have been substantially reduced, there is lots of hand-wringing about how the poor are taking on debt. This amnesia is funny to those of us who have been following this debate from times when rates were much higher and the poor borrowed very little. Then the complaint was "why are the rich locking the poor out of credit markets?" Resentment can be stoked in any situation. It is particularly hilarious because Keynes advocated for lowering interest rates in order to "euthanize the rentier" and he blamed the rentier class for keeping rates higher than they should have been. E.g. he blamed the rich for high interest rates. Now the argument is that rich are to blame for low interest rates. Keynes would be rolling over in his grave. But the persistent theme seems to be that the rich are to be blamed.

In fact there is nothing wrong with taking on debt. What matters is your ability to service the debt, and in a low interest rate regime, that service capacity is substantially increased, and thus so are debt levels. Perhaps this is not worth the trade off of increased financial fragility. Or perhaps it is -- data must be required and real arguments made. But merely the existence of the debt levels themselves -- again held both by poor and rich -- are not something to be avoided.

This blog post doesn't attempt to engage with any of this literature or provide any fact-based arguments about casual mechanisms or whether something is beneficial or harmful. It's just more hand-wringing, which is a shame as debt-dynamics, interest rate regimes, global investment flows and credit constraints are important topics that deserve to be treated seriously rather than as a political football in the resentment olympics.

The hoarded money will really move if the central banks A) stopped buying and B) sold everything

What Congress can do: keep wage workers on basic during recessionary periods and don't let the Fed buy bonds and mortgaged backed securities

So everything tanks to its natural market price while employers convulse and stop hiring, and more capital efficient organizations replace them, and the unemployment numbers can be ignored because they're fine for now

I find this statement quite tone-deaf. It’s hard to blame people for wanting a roof over their heads.

And I am still renting at 40. Getting an Instagram home takes time and saving for decades. It's always been this way.

I'm sure a similar argument could be made about education. I personally know a number of people up to their ears in debt for advanced degrees that have no economic value.