Inequality, interest rates, aging, and the role of central banks (2021)

Any practical allocation of new currency is going to be a misallocation, including a helicopter drop. The challenge governments have is inflating currency in a way such that it takes as long as possible to be fully reflected in the economy so that it is minimally disruptive. This turns out to be very tricky, precisely because it is virtually guaranteed to be a misallocation.

This is commonly misunderstood. Central banks create interbank money that cannot be spent outside the financial system. The banks themselves create the new money by issuing loans. However, they issue these loans to the already rich, thereby exacerbating existing inequality.

There's a crucial distinction here to make, you are naming the correct effect, and it has the correct effect, but it happens somewhere different, so your proposed solutions would be adverse.

Also, proponents of the cantillon effect forget that people with money can do an inverse cantillon effect by withholding their money from the markets and then they can do a regular cantillon effect by putting their money on the market.

If we assume a positive return on capital aka a positive interest rate then inequality would rise simply because the wealthy have most of their consumption needs fulfilled already and then in the late stages of capitalism they would be the ones manipulating the cantillon effect because they act as a quasi central bank.

When a financial institution borrows from a central bank, the financial institution records an increase in financial obligations (a credit to Liabilities), along with a corresponding increase in cash & equivalents (a credit to Assets). All of this is in the bank's balance sheet, easily verifiable (e.g., by reading annual reports).

What you're suggesting (somehow getting central banks to lend newly created money to individuals even if they don't ask for it) makes no sense.

And it's clear through this lens that if the Fed's goal was actually to have a stable currency, they would grow the money supply through this method. Under a helicopter money scenario, the intended inflation/counter-deflation would happen nearly instantly, they could get the exact amount required, and we would move on with our lives.

Right now we have lagging indicators for lagging indicators that are lagged through the Cantillion effect. Of course it's an absolute impossibility to get it correct! No wonder we get booms and busts!

Deflation is bad, it causes rent-seeking through hoarding money. But inflation is bad, it causes rent-seeking through hoarding assets. The goal needs to be against rent-seeking, against zero sum behavior. The only way to accomplish that is steady prices.

This model is communicated at large in various forms, "meritocracy", "you can do anything if you put your mind to it", "inalienable rights of life, liberty and the pursuit of happiness", "every life is sacred" and so on. It's such a common model, it seems unsurprising that many people balk at a need for explanation. It's like asking 'explain from first principles why 2+2=4'.

Obviously aiming for absolute equality would probably be more harmful. But there are plenty of arguments on why excessively high inequality is bad for the society as a whole. If you never bothered to read them and resort to silly conjectures like: "well, it's wrong because people kept saying so since I was young, duh!". Well...

Rare to find sound argument does not equal absence of argument.

I’m not sure what a first principles case would be here, but I guess it would need to start with an agreement about what a person is and what a society is, and the interaction between those two. Difficult as these are not agreed upon, even in the west.

On a relatively orthodox view on these points, your argument might be that beyond a given level of inequality, there are diminishing marginal returns to even the beneficiaries of the inequality. Tinbergen, a relatively well-known economist, thought this was around 5x disparity in income (ignore assets). You might argue about the precise figure, but having lived in places where there is high inequality, the crime rate put a serious cap on my perceived quality of life.

Extreme inequality is dangerous because the few wealthiest people concentrate enough power to overpower the mechanisms that keep the society stable and working. If you can bribe your way out of problems with law, or force the hand of the government by lobbying or menacing, you can break the society, while also acquiring even more wealth. If not stopped, the process leads to a dictatorship at the mildest, or a downfall at the most extreme.

I like that they didn't propose policies, as that brings in personal opinions.

The clear implication is “policies that address inequality.”

(Unfortunately, the only example the article gives is the wartime mobilization [0] that corresponded with the end of the Great Depression, which implies that the solution is to mobilize and launch a massive global conventional war, which seems both impractical and likely to have undesirable direct and indirect effects that would outweigh any salutary effects on the domestic distribution of income and wealth.)

[0] And unfortunately fails to point to a variety of anti-inequality domestic economic policies that were adopted within the US under the political cover of the war, which would–though definitely controversial–be a much more interesting discussion point than “wartime mobilization”.

This doesn’t make sense in any money system. For commodity money, the supply is set by mining. For fiat, by a Treasury.

I am quite certain they have an accurate high level understanding of the relationship between their supply, interest rates and inflation.

I would also like to point out that there are different types of interest rates. I am not sure what rates you suggest would be set by S&D.

Consider a house, the builder sells it once, but it gets bought and sold on average every 7 years subsequently.

Only if you’re buying directly from the business, which you’re usually not. Usually you’re just buying from another shareholder (could be another individual, a mutual fund, a hedge fund, whatever).

The proceeds may indeed end up filtering into the rest of the economy (I may sell you the stock to pay my mortgage, the hedge fund pays their traders), but the money doesn’t fund the business of the traded company.

could somebody expand on this please? as far as I understood it, companies like Apple don’t issue shares very often. How does the share price going up go to their business unless they issue more shares (diluting existing shareholders)?

This is a similar phenomena as the stock market. "Why does the stock market exist" is an interesting question. The textbook answer would be: it allows companies to sell pieces of themselves to the public in order to raise capital. The caveat to this answer is, 99.99...9% of transactions on the stock market every day do not land money back in the company's checking account; the money lands with the person who owned the stock previously. Because of Federal Reserve Guaranteed Inflation, that person probably, usually, over long enough periods of time, paid less for it than the current buyer, and five million exchanges down the chain for this physical stock certificate is the company, during their IPO (or when they release more stock), who made just a bit of money.

There's nothing intrinsically negative in what I described above; its just "markets". In fact, here's the counter-argument to the point the article makes about it being negative: Why would I, as an Investor, purchase a slice of the pizza delivery app Sliceline at IPO if I cannot make a return on that investment? Framework, the company making fully upgradeable and repairable laptops, needs funding; why would I invest in them if not to see a return on investment? I'm a homeowner; maybe I shouldn't purchase a painting from a struggling local artist; after all, it probably won't see a return on investment.

I intentionally slid down the slope of examples there to prove a point. Imagine you Have Money; maybe a lot of money, let's call it N dollars. How you spend that N dollars communicates your morals, ethics, and values; it defines what your future looks like, and at large enough values of N, progressively starts defining what the future of our society looks like.

A recent tweet, which I haven't found but you can search for, paraphrased: "In ten years, my husband's salary has increased 90%, while mine has increased 18%. I've spent most of that time curing cancer; he's been optimizing ad click rates."

What we're talking about is a phenomena I'd label as The Assetization of Everything. The vast majority of the monetary expenses wealthy individuals and corporations make is viewed through the lens of return on investment. Its very rare to see a corporation, or even wealthy individuals, say "we believe in X, we believe X is good for our society, so we are giving X $10M". "Investors" would ask: Wait, are you getting stock? Is it a loan? Can you write it down on your taxes? What's going on? Yet, anyone is totally able to do this. Its not because of some law, though corporate fiduciary duty isn't helping. Federal Reserve policy did accelerate it, but its not the cause. The cause is Cultural. It can't be fixed.

We, the world, are approaching the endgame of this very quickly. It won't be pretty. We are not allocating even adjacent orders of magnitudes enough resources toward solving problems that represent existential threats to, at minimum, our way of life; maybe society as we know it; possibly civilization; unlikely, but, the human race. Its not going to start with any of the traditional culprits though; AI, global warming, killer virus, whatever. It'll start with something that seems rather inane: it'll get harder and harder to find investments which generate returns. Put another way: deflation; we had an era of ridiculous prosperity where we could have allocated resources to stave off the coming actual crisis, but we didn't, and now no one wants to invest in solving them.

In the stock example, companies are also wealthy entities that hold cash when interest rates are cheap. For example, in 2017 (when rate targets were just above 0%) Apple had hundreds of billions in cash in Ireland and other tax haven nations. When Abenomics began in Japan and the Bank of Japan introduced zero interest rates and quantitative easing and yield curve control, one of the first things that happened was that companies started building huge money stores. When inflation remains stubbornly low, there isn't a strong need to get rid of your cash because it isn't losing a lot of value and you take little risk. You may as well hold on to it.

You're right that these economic activities are better than nothing but they aren't the kinds of activities that puts a generation of people to work and start building the kind of wealth that supports a family.

What is more often considered bad is "inequity", which is what prevents a lot of people from earning a good, decent life. Some people work very hard in life and don't make any major bad decisions, and still have a hard life. Other people work little and have a good life. There's both inequality and inequity in this picture, but they're not the same thing.

What people object to is not mere inequality: inequality is expected to exist anywhere money exists. What people object to is "excessive inequality", or distributions of wealth where the Pareto coefficient is "too extreme". The reason why this is bad is because it effectively makes the "American dream" impossible for nearly everyone, in the extreme case.