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I've argued this for years. Interest rates peaked at about the same time that wealth inequality began to diverge around 1980 or so. I don't think any of this is terribly complicated. Money is a commodity, and like all commodities, the price is set at the margin. Money also has diminishing marginal utility, so as you accumulate more of it, at some point it has less use.

Think about two people, one extremely wealthy, one middle class. The middle class guy making $75k probably has to spend all his money for consumption: food, rent, car, etc. There's little left over for saving or investing. In order for that guy to justify forgoing consumption and instead saving it, he requires a high interest rate, otherwise it's not worth it. But what about the guy worth $100 million? He can't spend it all on consumption, so he has to save a lot of it. Ah, but what's his opportunity cost? Zero. He has no choice, and the money he'll earn from interest won't even get spent anyway. So, two people, two very different marginal costs.

The world is just one giant pool of capital. Over the last four decades, as capital has shifted from being more evenly spread out amongst people with high marginal costs to a smaller group of people with marginal costs of zero, interest rates keep falling...the majority of capital now resides amongst people who can't spend it all and are happy to earn any real rate of return.

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I'm not sure I agree with this. "Interest rates" in terms of savings rates are typically below inflation. The wealthy guy and the middle class guy are not going to do well keeping their money in a savings account. Both have to find better ways to allocate their money and take on a little risk. Whether that is investing in a business, stocks, real estate, whatever is a better option at that time.

Low interest rates actually give middle class guy more opportunity because it becomes cheaper to borrow. You can use leverage to increase your position. The most common form of this is a mortgage, but there are many other ways to utilize debt properly as well.

I'm far from an economics expert, pretty novice actually. So I am probably wrong. But as a guy who came from a lower middle class household and has utilized debt & investments to change that significantly I feel like low interest rates have been a huge part of that.

It really is hard to say whether it is better or worse for the "middle class guy." Sure, it makes debt more accessible and also makes debt faster to wipe out due to inflation, but low interest rates typically increase asset prices (everything else being equal, which it usually isn't) and assets are primarily owned by the wealthy.

> Low interest rates actually give middle class guy more opportunity because it becomes cheaper to borrow. You can use leverage to increase your position. The most common form of this is a mortgage, but there are many other ways to utilize debt properly as well.

It is the same for everyone else, hence assets get more expensive. It washes out, unless you make riskier and riskier bets to stay ahead of the curve. Some will win, but most will lose.

But for the poor, a 2x in cost of milk isn’t as burdensome when there’s a 1.2x in hourly wage. Plus, the cost of borrowing to buy that new car went down. Even though I hate this current inflation in ALL non-cash assets, it’s been generally positive for the poor, in the short-term, anyway.

Is it really though? As relative demand for consumption falls there is less demand for labor. Wages stagnate and fall while income concentrates further. Most poor people wish most for a path out of poverty, but what we've seen is that the paths out have become less successful and more expensive e.g. College.

I said short-term. Which is all voters care about.

How is a doubling in prices offset by a 20% increase in wages? And has there every been a time when high inflation was offset by and even higher increase in wages? Wages never keep up and inflation always hurts the poor. A rich person couldn't care less if milk's price doubles. They'll drink just as much milk. A poor person who's banking on that yearly bonus/bump in pay to pay for all the next year's inflating milk, is going to have to do without some milk.

If it's only the cost of milk that has doubled, I agree that a 20% hourly wage increase will cover it. It's a different story if the overall cost-of-living outpaces wages.

The wealthy may not keep their money in savings accounts (they dont) but I think the GP's argument still stands -- because most other products pay a spread above the base rate. If savings rates are low, so are all riskier rates above. As an example, Triple A corporates generally pay a mostly-consistent spread above the risk free rate. Triple B pay a mostly-consistent spread above that. And so on.

a combination of cheap mortgages, surging home price, surging stock prices, and high-paying professional jobs. You see this all over Reddit on popular Fire subs of ppl in their 20s and 30s with substantial wealth thanks to those four factors.

For people with good incomes and and hence an opportunity to borrow and invest, the past decade has been amazing.

> The middle class guy making $75k

If one person is making 75k they aren't middle class. 75k might not go very far with kids but in that case their spouse would also likely be working so the household income would be significantly higher than that.

Edit: To be clear, the actual definition of middle class income is much lower as well:

https://www.cnbc.com/2021/07/21/middle-class-calculator.html

> That puts the base salary to be in the middle class just shy of $46,000.

I'm guessing I am getting voted down because a lot of people here think it's difficult to live on 75k, but the reality is that a huge percentage of americans are living on even less, so the difficulty of getting by with kids on 75k doesn't really affect whether an individual making 75k is considered middle class or not.

Yeah, it's easy to underestimate just how little money most Americans make when you're in your 'bubble'. Something like only 30% of Americans have a college degree. the other 70% are likely going to be in that sub-45k bracket.

I don't think it matters if $75k is middle class or not. It's definitely not ultra rich, as was the other example person in the original comment, so the argument still applies.

Middle class is kind of an arbitrary term though. I think working class describes things much more clearly (I work for an employer for a living). And there are plenty of working class people making $75k a year.

"Money also has diminishing marginal utility, so as you accumulate more of it, at some point it has less use."

Thats true assuming the same scope, like living expenses. It gets a little more nuanced if the person changes the activities in scope. If you're giving billions away in a philanthropic organization that you run (ie Gates), then you've found new utility for that money. So in some ways it has more possible uses, but less pressure to actually use it. But I think your implied point of limited choices for people with lower income/capital is still valid.

It's unequivocally true, diminishing marginal utility of money is basically an axiom.

If it's unequivocally true, how about a source that shows scope does not impact it?

I'm simply stating that money does not have fewer uses as one gets more of it. Usually the person's scope changes to include new uses that were not previously possible. The important thing to note is that utility is being used in mixed definition here. Strictly speaking it's definition is happiness or satisfaction. The part about having less use doesn't necessarily match this.

Diminishing marginal utility is an axiom over fixed magnitude amounts of a good. Bill Gates still gets less out of an additional $10 even with new opportunities for philanthropy than a panhandler who is hours from starving to death and currently has $0. "Diminishing" doesn't mean it has to go to zero, but Bill Gates is not going to be in any situation where some number of dollars given to him on top of what he has means the difference between life and death.

Heck, this exact fact is the very reason why Bill Gates engages in philanthropy. He realizes that other people need the money more than he does.

Yes, but that wasn't what was explained.

"Money also has diminishing marginal utility, so as you accumulate more of it, at some point it has less use."

The additional money does not have less use. It's just not going to add as much to quality of life or dictate "life and death". There are still many uses for it, so of which may not be possible with lower amounts.

If you consider "add to quality of life" a synonym for marginal utility I think you may be in agreement.

Yes, $10 buys the same Mcdonald's lunch regardless of how much money one has, but two people, one with $0 and one with $1bn in net worth will be excited about that lunch to very different degrees.

"Money also has diminishing marginal utility, so as you accumulate more of it, at some point it has less use."

This thread in response to this, to point out that the use of money is not the same as the marginal utility.

Diminishing marginal utility of money means that each additional dollar spent results in a smaller increase in quality of life. This is true of all consumption goods. For example, if you don't have a car, and you buy a car, your quality of life will improve a lot. If you buy a second car, it will improve only little. By the time you have 15 cars in your garage, buying another car will do nothing to improve your quality of life, or it could even worsen your living conditions.

Yes, but that wasn't what was explained.

"Money also has diminishing marginal utility, so as you accumulate more of it, at some point it has less use."

The additional money does not have less use. It's just not going to add as much to quality of life. There are still many uses for it.

The word utility is being used in a fashion different from your lay understanding.

Maybe you can tell me what you think it means and what I think it means then. Investopedia and my work in finance both seem to support my take.

Sure. Utility, in this sense, is a proxy for the enjoyment/satisfaction gained by the consumer from the thing.

You seem to be interpreting utility in terms of the quantity of things the money can be used for or in terms of the societal benefit that can be obtained from the money, it is not entirely clear.

"Money also has diminishing marginal utility, so as you accumulate more of it, at some point it has less use."

This thread is in response to this, to point out that the use of money is not the same as the marginal utility. Its mot like having a bunch of money makes it less useful or have fewer uses.

> use of money is not the same as the marginal utility

Yes, but as I said above, in this case having use is defined relative to promoting your own satisfaction as a consumer.

I think you are trying to tease apart "utility" vs "use", but to have utility is the property of having use. It's a question of what the utility/use is in reference to, and for economists, that utility is in reference to preference satisfaction by the consumers.

And even when using that definition, it doesn't mean there is less use. It will add marginal use for each addtional dollar, and increase overall use.

Saying it's an axiom is correct - economists generally pose this as a fact, but where would we end up if it was the opposite, if the utility of money rose with the amount you have?

In other words: if the diminishing utility axiom were true we could start redistributing now, but one would predict the money owners would be against it.

It's proof by contradiction - everyone knows money is political power.

> if the diminishing utility axiom were true we could start redistributing now, but one would predict the money owners would be against it.

If something has diminishing *marginal* utility if doesn't follow that a third party has a right to seize it(property rights, different/tangential topic). Therefore this:

> It's proof by contradiction - everyone knows money is political power.

Is an inconsequential conclusion.

It's at best a strong hypothesis. There can be situations where utility is constant or even increasing (not necessarily monotone). If I can only afford one shirt then actually going for a situation where I can own three shirts could make my life a lot simpler, similarly, being able to afford a car could have strong positive effects.

I think, the idea that getting rich does not create a lot of additional joy from diminishing utility is one the best fairy tales ever invented.

I sort of agree, but would say that fairy tale part might be better described as a psychological effect, but still consistent with your questioning it as other than a hard economic fact. What I mean is that the person's psychology may change as they become accustomed to a specific standard of living. For example, if someone grows up driving new BWMs, they might see it as "normal" and not derive as much joy from it as someone who got a new BWM after working for it for years. So it seems that the axiom is specific to an individual and their psyche, which provides provides few beneficial use cases beyond understanding that if people have 'a lot' of money, then money might not be a strong motivator.

> think, the idea that getting rich does not create a lot of additional joy from diminishing utility is one the best fairy tales ever invented.

It's diminishing marginal utility. Every single comment I've gotten disputing this either misinterprets the word "marginal" or the word "utility", I encourage all of y'all to take an economics course.

Sorry, just skipped the "marginal", but my point stands: the marginal utility does not need to drop. I could enjoy my 10th car just as much as my 9th... or even more (and I have taken some economics courses). Similarly, going from $1B to $2B might more than double my total utility, nothing is stopping that from happing a priori

Edit: granted, there are a lot of observable situations that do indeed show diminishing marginal utility, but I think the concept is often too much taken at face value when actual data or analysis is scarce and the marginal utility might behave in a more complex way

Yes, because economics is a social science, none of its axioms are "a priori" in the same sense that they might be in math.

That said, the empirical evidence is pretty overwhelming in favor of diminishing marginal utility of money, in addition to the fact that it just makes sense. Actual data on this phenomena is not actual as scarce as you seem to be suggesting.

I am aware of some older studies on marginal utility of money for individuals, but they span quite low income/wealth. I have seen some small data that suggest that at the very least the drop in marginal utility is much weaker than previously thought for high wealth brackets. Do you have some pointers to newer data on UHWIs, for example?

I personally have found that there were times when the marginal utility of my additional wealth was growing as I could suddenly do things I could not do before... (while it other times it almost felt like 0)

>If you're giving billions away in a philanthropic organization that you run (ie Gates), then you've found new utility for that money.

Billionaires give away far less of their money compared to the average person:

https://www.msn.com/en-us/money/other/ceo-says-billionaires-...

>Based on these figures, MarketWatch reported Bezos donated just .5 percent of his net worth last year - a quarter of the 2 percent the average American donates each year.

Also, why should money be concentrated in the hands of the ultra-wealthy, does their wealth make them more qualified to decide how it's spent compared to society/government?

https://www.theguardian.com/commentisfree/2020/apr/12/americ...

>First off, the amounts involved are tiny relative to the fortunes behind them. Bezos’s $100m, for example, amounts to about 11 days of his income.

>Well-publicized philanthropy also conveniently distracts attention from how several of these billionaires are endangering their workers and, by extension, the public.

>And why should we believe that Gates or any other billionaire’s “boldness” necessarily reflects society’s values and needs? Oligarchies aren’t the same as democracies.

I think you're getting off track or putting words in my mouth.

"Based on these figures, MarketWatch reported Bezos donated just .5 percent of his net worth last year - a quarter of the 2 percent the average American donates each year."

I'm not looking at percent of net worth. Most of the time that is not the "money" that we are talking about here and would not be subject to the utility and use being discussed. For example, the vast majority of Bezos' worth is tied up stock. Also, not every billionaire is the same. Some may not be giving much, but there are many who have pledged to give away the majority of their fortunes.

"Also, why should money be concentrated in the hands of the wealthy, does that make them more qualified to decide how it's spent compared to society/government?"

I've made no claims or mention on this topic.

"Well-publicized philanthropy also conveniently distracts attention from how several of these billionaires are endangering their workers and, by extension, the public."

Again, not part of my discussion. However, I will say that I find this to be untrue when you see articles coming out discussing this very thing (ie your quote).

"Oligarchies aren’t the same as democracies."

Again, off topic. I agree that they are different. I even agree with the implied part about living in an oligarchy. However, that oligarchy in my opinion is more based on if someone is in the ruling class with special privileges and the power to ignore laws when they want (politicians, judges, cops, DAs, etc) than being a billionaire (although money can help influence).

>Most of the time that is not the "money" that we are talking about here and would not be subject to the utility and use being discussed. For example, the vast majority of Bezos' worth is tied up stock.

It could be subject to the same utility if we taxed it, that's what I was getting at. Wealthy people aren't using money that society could put to great use.

>Also, not every billionaire is the same. Some may not be giving much, but there are many who have pledged to give away the majority of their fortunes.

Why settle for "some" when we could tax all of them?

Again, this whole 'tax the rich' bent you are on is off-topic. In fact, it seems you are not understanding utility in this context of marginal utility.

"It could be subject to the same utility if we taxed it, that's what I was getting at."

"Wealthy people aren't using money that society could put to great use."

Then you could say that the average person's 401k isn't being used either. But investments are a use of money that do contribute to society in providing capital to businesses and individuals. Gains on those investments are also taxable.

There are plenty of things we could do, but that's not really what we are discussing here.

>Then you could say that the average person's 401k isn't being used either.

But the average person has much more marginal utility for their amount of wealth. Going by the average 401k balances here (https://www.investopedia.com/articles/personal-finance/01061...), the marginal utility of dollars $38,401, $160,001, etc is much greater than even millions of dollars at Bezos and Gates level wealth. What else am I missing about utility in this context?

>Gains on those investments are also taxable.

At a much lower rate than income, further cementing the advantages of the ultra-wealthy.

"But the average person has much more marginal utility for their amount of wealth."

Not while it's invested and locked away in a 401k, according to your comment about it not being used (presumably consumption based):

"Wealthy people aren't using money that society could put to great use." Emphasis mine

"What else am I missing about utility in this context?"

This thread was in response to someone claiming money has less use when you have more of it, which isn't really what marginal utility is about.

"At a much lower rate than income, further cementing the advantages of the ultra-wealthy."

Ok... we aren't really discussing rewriting the tax code.

> Also, why should money be concentrated in the hands of the ultra-wealthy, does their wealth make them more qualified to decide how it's spent compared to society/government?

This is why Bill Gates is still a monster to me. The amount of damage he did through Microsoft over the decades (both corrupting culture so everyone is tied to using MS Windows and the people MSFT economically wiped out) cannot be measured. His after-the-fact giving does not make up for it.

Eh. Part of the reason is that living in the US is just plain expensive.

According to statistics on average American household budget, 16% goes to housing. 14% goes to transportation.[1]

So you can say that 30% of your consumption goes directly to land use, because cars need infrastructure and because we refuse high density housing and increased barrier for new housing supply.

Taxes, which is 12%, actually comes a distant second.

Also, with 75K, sounds like you would have ample amount to invest.

1. https://www.valuepenguin.com/average-household-budget

$75k household income with kids is a pittance in pretty much all areas of the US that have seen economic growth in the past few decades. Most people are simply skipping saving/investing sufficient funds for their old age/emergencies (a few million by 65, but I would say you need decent portion by 50 since likelihood of being unable to work starts going up a lot).

This is part of the reason birth rates are down.

per the article's central thesis. If Income inequality changes direction births will rise.

Unlikely. Educated, empowered women with access to family planning facilities have less children if they have any children at all. Birth rates in developed countries with more robust social safety nets and less inequality have total fertility rates below that of the US.

https://ourworldindata.org/fertility-rate#what-explains-the-...

More likely than unlikely.

> Educated, empowered women with access to family planning facilities have less children if they have any children at all

This has nothing to do with wealth inequality. This does have to do with optimizing for wealth accumulation. Possibly something to do with Quality of Life, wherein children used to improve it comparatively, while now they are more of a risk proposition. For people in poverty, they are a (subsidized) source of income, which is unfortunate.

What's interesting though as that households with over $200,000 in income have the lowest birthrate of all. The highest birthrates are in households with very low income. In essence, for every dollar of household income you have, your birthrate decreases.

I suspect birthrate’s biggest factor is women’s financial independence and access to cheap and convenient birth control such as IUDs and birth control pills.

Birthrates are plummeting even for low income households, and I would bet it has something to do with Affordable Care Act of 2010 greatly increasing access to birth control by making it free. From the women I have spoken to, it is almost a no brainer to get an IUD.

https://www.statista.com/statistics/562541/birth-rate-by-pov...

I think societies are about the find out the real price of having babies now that they are not simply a byproduct of sex or women not having power.

> I think societies are about the find out the real price of having babies now that they are not simply a byproduct of sex or women not having power.

Can you expand on that, I'm not sure I follow?

Up until a few decades ago, women did not have a nearly foolproof way of preventing pregnancy while still being able to have dec. As well as having the power (financial independence) to say no to anyone pressuring them into getting pregnant. So now, the fertility rate will more accurately reflect a woman’s desire to get pregnant (at a certain age, at a certain income/wealth, given a certain set of possible partners, given a certain number of other children they already have, in a certain culture/time).

The caveats in the parenthesis are almost unnecessary though, since we are seeing declines in birthrate across all incomes/wealth levels around the world. I think we will see very, very few women choosing to have more than 3 kids, or even 3 kids. I actually only know of 1 couple with 3 kids, everyone else has 0, 1, or 2, and I am in mid 30s.

Decline in birthrate is a good thing, especially if we combine it with the reduction in mortality, and hopefully slowing aging and reversal of aging.

There is a crossover point somewhere on the income/QoL scale where children go from utility to liability.

It's incredible recently, and still only in some countries, where children are in the liability area. By and large for all human history, children where a utility. More or less free labor to help support the family.

I suspect high income >200k/yr households are also highly correlated to high CoL locations. If you live in an SF 1 bedroom that costs 1.5 million dollars the marginal cost of an additional child is likely to be over a million dollars in the first 10 years of life. A family with exactly 200k/yr is at the entry point for financially achieving what would have traditionally been viewed as a middle class financial situation in the US e.g. owning a home, funding a retirement, taking regular vacations, paying for children's college etc. Even 1 child in a high CoL location can jeopardize these goals.

A relevant number would be the difference between income and the marginal cost per child.

And why the pyramid scheme is going to collapse, unless we can continue to undercut our own workers with cheap/static cost immigrant labor.

Singapore has entered the chat with the lowest birth rate in developed nations despite massive leverage of cheap foreign labor.

I mean, that makes sense. The immigrants are there to replace all the missing kids (as well as unskilled workers).

The workers were there before the lack of kids.

What's interesting is birth rates say otherwise. The wealthier you are the lower your birthrate. People that can certainly afford to have many children are not where as very low income people are having many. I think it's something more than people feeling like they can't afford it.

https://www.statista.com/statistics/241530/birth-rate-by-fam...

Birth rates for lower incomes are plummeting too, so I think it is mostly lack of access to birth control like IUDs and pills, but also lack of women’s financial independence.

https://www.statista.com/statistics/562541/birth-rate-by-pov...

Possible causality inversion? People have more money because they chose to not have kids, all else being equal.

"Also, with 75K, sounds like you would have ample amount to invest."

Depends on location and if you have a family. $75k for a single person in an average area will provide a fair amount to invest. $75k for a family of four in most suburbs is going to be tight. In either case, the value available to invest is substantially less that high net worth individuals and will limit many investment opportunities (private equity, accredited investor status, and likely not making enough to take advantage of mega backdoor Roth).

With housing, cause and effect probably runs the other way. It’s seen as a good investment and soaks up monstrous amounts of capital, and for that machine to work and Calpers to pay pensions, housing prices must always go up.

Where in the US are middle class families getting away with 12% in taxes?

Yeah at $75,000 your effective tax rate is around 17% in most states with state income tax and probably around 15% in states that do not.

Of course this doesn't cover property tax, sales tax, etc.

This is a handy calculator to calculate effective tax rates:

https://smartasset.com/taxes/income-taxes

That page is not exactly neutral though: it includes FICA (not completely unreasonable, though maybe uncommon) and includes FICA in Household Income (who knows their income with FICA included?).

Blue collar worker in non-income tax state that doesn't own property and has 2-3 kids is probably going to be around 12-15% overall. That's a pretty small subset of the country, 2-3 states or so. If you use the same book of tricks (i.e. ignore a myriad of local taxes and taxes collected on goods sold) that people around here typically use when trying to make certain high tax states look not too out of line with the national average then huge swaths of the south and midwest would be included.

>If you use the same book of tricks (i.e. ignore a myriad of local taxes and taxes collected on goods sold) that people around here typically use when trying to make certain high tax states look not too out of line with the national average

It really irks me when people do that. They also conveniently leave out items such as the average cost of electricity or gas prices.

There are 8-9 states without income tax, not 2-3.

Some of those have other taxes that are high to make up for it hence why I said the number where the all things considered tax burden is down at 12ish percent is probably low single digits.

Median household income in the US is $80k/yr. If you live in say Houston or Orlando a married couple will pay $6,230 in federal income tax + $6,120 in FICA for a total of $12,350 in taxes or 15.4%. If they have children, they will pay less.

A lower middle-class couple with similar circumstances making $50k will pay 12.9% in taxes.

This doesn't take into account property tax, sales taxes, fuel taxes, car registration fees, etc.

> Median household income in the US is $80k/yr.

No, its not, its about $65K. Though Google’s Knowledge Graph pulls a snippet about the structurally higher median family income if you search for median household income.

income tax rates in the US are pretty low, especially compared to the rest of the world. Even if your income crosses into a high bracket, you only pay the higher rate for anything above the threshold, so your effective rate is much lower often. the In addition to various benefits and other programs to help families. There is ton of assistance and other programs.

Plenty. States with low or no income tax, add in SALT and mortgage interest plus 401k deduction. Then tax credits.

My brother mentioned he was paying around 10% as a single person with a $50k income a few years back.

== So you can say that 30% of your consumption goes directly to land use, because cars need infrastructure and because we refuse high density housing and increased barrier for new housing supply.==

Aren’t the most dense and transit friendly places also the most expensive (SF, NYC, etc.)?

Density is part of the equation, but you need to keep increasing housing supply. Ditto for transportation investment.

Trains are very cost effective method of transportation, but it doesn't mean squat if fare is high and demand is overwhelming.

> Eh. Part of the reason is that living in the US is just plain expensive.

This is backwards. The point of the article and the GP is to explain why it's expensive. Reason seems to be low rates -> assets inflate. Naturally those assets tend to be in the hands of older/wealthier people.

Part of it. The inability to increase housing supply meant that the inflation of home value cannot be blunted.

Not sure how high interest rates mean better return from investment. I mean look at the chart from last two decades or so. If by investment you you mean giving money to the bank so the bank can loan it to other people then obviously the investment will be paid by people who need loans which is, you know, not exactly good for lower/middle class.

I for one think near zero interest rates are optimal. As o long as we can ensure there isn't too much irresponsible lending. Liquidity is very important and ensuring people who can make use of the money have easy access to it is very important.

It's a pool of capital, but it's not a fixed pool. It's not as if my house or 401k going up in value makes someone else's go down.

I think it's not a bad analysis, but entirely absent from your story is the Central Bank and I really don't think that can be absent from discussions of rates.

By far the biggest supplier of credit are banks, not private individuals - and their supply is effectively dictated by the Fed.

The Fed is reactive. The Fed doesn't set interest rates, the market does. I believe this is one of the biggest misconceptions about our central bank. Yes, the Fed plays an obvious role, more to do with printing money for whatever the issue-of-the-day is, but the market is far more powerful than the Fed when it comes to interest rates. If the Fed raised rates 500bps tomorrow, over time, interest rates would still settle back at 0%, and all the Fed would've done is created complete dysfunction.

Central banks are reactive.

> The Fed doesn't set interest rates, the market does.

The Fed sets interest rate targets, and the intervenes, maasively if necessary, in the market to acheive them.

> If the Fed raised rates 500bps tomorrow, over time, interest rates would still settle back at 0%

The only reason rates are near zero is that the Fed has set its rate target near zero and intervened massively in the market to attain that target. If the Fed raised its rate target and kept it higher, rates would rise and stay higher. When the Fed target, was higher (most of the Fed’s history), interest rates remained higher.

The Fed doesn't set its targets based on what it thinks the market would do without intervention, but based on what it thinks needs to happen to achieve its balance of employment and price stability objectives.

> Central banks are reactive.

You bracket your post, beginning and end with it, but you don't seem to understand that all it means is that Central Bank action goals respond to observed conditions. You act as if it means the Central Bank is impotent to affect conditions, and in particular interest rates, which is clearly false.

> [Feds] intervenes, maasively if necessary

The Feds have some scope to nudge the interest rate, but they cannot massively change it against the market. The persistent low rates of the past 2 decades are mostly market driven, because there's been a lack of growth.

The feds try to nudge lower the rates past the "natural" rate (a rate as if they weren't there), but the trend of the rates being down isn't determined by the Feds.

Seems surprising to me that you can look at financial history and conclude in any way that the Fed is somehow impotent.

this video gives an opinion that i believe to be true: https://www.youtube.com/watch?v=92MA6CxhBXA

The feds have the ability to influence rates a bit, but not set them directly as they wish.

I guess I disagree with this guy's characterization - unless the point he is making is that the Fed has to operate within the constraints of what makes sense given the market or otherwise the market fails.

This blog post summarizes my opinion https://www.themoneyillusion.com/monetary-policy-and-interes...

> Fed has to operate within the constraints of what makes sense

that's an implicit assumption all rational economists would have. It's like saying the US could just be holding the entire world hostage by threatening to nuke the entire world.

The blogpost you linked is basically confirming that the feds don't have unlimited room for controlling interest rates. they can merely nudge it a bit here and there, and hope for the best.

I like the analogy of the bus driver through the Alps.

But they can only set the Fed Funds Rate at a rate that is lower than the 30y Treasury rate. Any higher and we get a yield curve inversion and a recession[0]. And as the GP says, the destabilizing effect of that recession only pushes rates down until we reach 0%.

So as the 30YT falls, the Fed can do nothing but allow it to fall further.

[0]: https://fred.stlouisfed.org/graph/?g=ENDs

> But they can only set the Fed Funds Rate at a rate that is lower than the 30y Treasury rate.

Wrong. They can set the Fed fund rate target anywhere they want. The same interventions that move the rate the target addresses toward the target also normally move other rates, including various Treasury rates, in the same direction, which is why Fed action on the Ged funds target is usually discussed as action on interest rates, not just the single rate the target nominally applies to.

> Any higher and we get a yield curve inversion and a recession[0].

Yield curve inversions (in any of the Treasury rates, not just the 30-year) are typically viewed as potential recession signals because they reflect an abnormal decoupling of usually-linked behavior representing broad insecurity with the investment opportunities in private markets. They are not viewed as causing recessions, and thus the 30 year Treasury rate is not a constraint on Fed funds targets.

They can set the Fed fund rate anywhere they want... if they are willing to accept the consequences of doing so.

Anywhere they set the Fed fund rate, there will be consequences, of one kind or another. The Fed is trying for the lest-bad set of consequences, and therefore their possible policy is severely constrained.

Does the Fed have the ability to set interest rates at whatever it wants them to be? Yes, end of story.

Should the Fed set interest rates arbitrarily? No, but that was not what was being discussed.

> They can set the Fed fund rate anywhere they want... if they are willing to accept the consequences of doing so

Sure, the “consequences of doing so” is how they choose where they want to set them.

The upthread suggestion that the 30yr Treasury rate puts an effective cap on target rates because a yield inversion will cause a recession (and, implicitly, Treasury rates are unresponsive to the policies that are used to achieve the Fed funds target) remains false and based on mistaking a symptom with a cause of recessions.

You have cause and effect completely backwards.

It's not so much that central banks are reactive as that central banks can't set interest rates and the inflation rate simultaneously. In other words, central banks can set nominal interest rates, but real rates (i.e. nominal rates adjusted for inflation) are ultimately set by the market.

This is just an indirect form of the impossible trinity. https://en.wikipedia.org/wiki/Impossible_trinity

Targeting low inflation is price stability and assuming every single central bank targets the same inflation target then you implicitly target a specific exchange rate (with some fluctuations). If you set the interest rate arbitrarily people flee the currency and break the implicit peg which can manifest itself as inflation.

The Fed has effectively complete control over nominal rates, your mental model for the economy is incorrect.

I am unsure why you think that 0% is the natural rate for rates (I'm assuming you mean real as the alternative misunderstanding is even worse). People prefer to have money now rather than money later.

He just means that raising interest rates will lead to less debt growth and therefore decrease inflation which then lowers the natural interest rates downwards where it will then get stuck at 0% because negative interest rates can't be implemented on cash.

According to the Friedman Rule 0% interest is an ideal interest rate assuming no inflation or deflation. However, what ideal really means in practice and whether we can actually have no inflation is still unknown.

I can see the logic of this statement, and it is in line with a lot of economic thinking... but I disagree with the jist.

First, the "price of money," is not set by markets if by "price of money" we mean interest rates. Interest rates are set by a central bank, which is a monopoly. IE, only the ECB can make euros. Only the Fed can make dollars. Exchange rates are set by the market, but the interest rate is a decision made in a boardroom. Money is not a commodity, like other commodities. It's price (interest rates) is not determined by supply and demand. It's determined by monopoly price setting.

Pegged currencies work the opposite way. CBs set the exchange rate, but they can't control interest rates. You could make the argument that the "price of money" is represented by exchange rates in the former, interest rates in the latter. But semantics aside, I think it's important to start with a recognition that CBs set interest rates as they see fit in most major currency markets today. Fed interest rates are not market determined.

This is also (a not unrelated) thing that has changed since 1980. There was also a shift from pegged and semi-pegged currencies to floating exchange rates.

Second, interest rates are not the actual return on savings in most cases. Most "savings" are in assets. Pension portfolios, private wealth funds, real estate, etc. These are the returns that "justify forgoing consumption," not interest rates. Returns on such investments have been high in recent years. CB interest rates translate relatively directly into the cost of borrowing, and the cost of repaying old debts. Interest rates do not determine the return on savings.

Third, and this is where Thomas Picketty makes his controversial points... there is not much give in the "money now vs money later" market. For the most part, ordinary people spend their income. Wealthy people save/invest their money. When wages rise, the volume or price of goods may rise. When investment returns rise, the value of assets rise and inequality is increased. Regardless of profits, losses, taxes or such, Bezos' lifestyle will not change. Only the value of his assets will change. At the extreme end, poor people spend all their money and have no assets. Rich people save all their money and have negligible spending.

The fact that market returns, the real "savings rate" have been high has not, on average, encouraged middle class guy to save more.

That said, if you aren't already, you may interested in Hayek. His most famous work is all about interest rates as prices, and choosing between money now and money later. I disagree, at least in regards to 2021, but he was a clear writer and worth looking up.

> Exchange rates are set by the market, but the interest rate is a decision made in a boardroom

Only partly. One of the points the author makes is that central bank interest rates, while conceptually set arbitrarily "in a boardroom", are constrained to a narrow range by market realities, and attempts by "the boardroom" to set interest rates outside this range result in various forms of economic dysfunction that central banks try hard to avoid.

> Returns on such investments have been high in recent years. CB interest rates translate relatively directly into the cost of borrowing, and the cost of repaying old debts. Interest rates do not determine the return on savings.

Yes and no. We've been in a bull market for so long that people such as yourself have begun to think of investments as simply savings with high yield. You're neglecting to account for risk. CB interest rates set the risk-free savings rate. Of course you can get higher returns by taking more risk, and for most people, taking a bit of risk is the right thing to do.

Re: CB interest rates

I realize this is controversial, and many economists still disagree. I do think that wind is blowing in my direction though.

IMO, this is Monetarism's big mistake. Now that floating exchange rates are the norm, this becomes more clear. Interest rates are not constrained to a narrow range by market realities. CBs can set them to 0%, as we now see. They could set them to 1000% if they chose, since CBs can print arbitrary sums to pay interest.

Interest rates have consequences in the economy, but not restrictions. Those exist in a pegged currency world, not in floating exchange world. If depositors don't want to own CB bonds, they can redeem them for dollars/euros. The CB will always have dollars/euros available to make good on that.

>First, the "price of money," is not set by markets if by "price of money" we mean interest rates. Interest rates are set by a central bank, which is a monopoly. ... It's determined by monopoly price setting.

The alternative is free banking and it is unlikely to work with a shared currency. Each bank would need to issue its own currency.

> Interest rates do not determine the return on savings.

Technically a high interest rate competes with investments for capital. It means someone is borrowing money at high interest and wants you to make enough room in the economy for that investment. The interest isn't the return, it's the compensation for the inconvenience of delaying spending. If the interest rate is higher than what solvent borrowers would pay then the interest rate on bank accounts directly competes with investments for capital. An investor getting 5% on a bank account will not spend the money on an investment that returns 4%. The absurdity of this choice is that if there are no borrowers at 5% interest no investments will actually be made. The investor is creating a hole in the economy for no reason.

I don't think you have explained the reason for the capital accumulating more at the one side of the margin. Or maybe I just didn't understand?

Excellent question.

I believe technology is the primary culprit. Think of something like WhatsApp, which Facebook bought for about $20 billion and would be worth who-knows-how-much today. I think WhatsApp had like 70 employees, a couple founders, only took a small amount of capital, and yet created $20 billion of value in a company in just a few years. Go back a couple decades when technology couldn't scale like it can today, what would it take to create a $20 billion company? How many years, how many employees, how many suppliers, how many customers, how much capital, etc etc. Instead, it was like three guys who each made $7 billion or whatever. This word "scale" is really just code for concentration, as in, a company can grow without having to spread the wealth around, it can instead accumulate to a relatively small group of highly intelligent and creative people. Technology enables that top echelon of people to keep more for themselves.

So, I would say technology in a general sense is really what's driving wealth concentration. The long-term persistency of declining rates and increasing wealth concentration tell us it has to be structural, and I'm not sure what else can explain it. But, people are often uncomfortable with this, because it's not fixable. High taxes don't fix it over time, because we can keep replaying that game over and over again and the smartest will just keep winning and amassing a disproportionate share of the wealth created.

This is pretty similar to what Thomas Piketty says in Capital in the 21st Century

> But what about the guy worth $100 million?

Question - which guy with $100million - the one with it all in cash, or the one who owns a company that is “worth” $100million ? Those are two very different people.

No, it's the same. He created $100 million for himself that might have otherwise be spread out amongst employees, suppliers, investors, etc, who would've used their "share" of the $100 million for consumption and savings, with higher marginal costs of saving. Whether it's cash or equity is irrelevant because money is fungible...he's just skipping the step of converting it to cash and saving/reinvesting it.

Fascinating comment

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