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Comment by schemescape | Hacker News Reader

I don’t see the logic there.

If they both got the same interest rate, then their wealth would grow at the same rate. Add in progressive taxation and the gap might narrow.

If they’re getting different rates and taxation is regressive, then those seem like better explanations.

Edit: also spending patterns.

Edit again: note that this wasn’t meant to be a complete explanation. I just wanted to point out a few reasons why compound interest is not sufficient to explain a widening wealth gap (the claim in the comment I responded to).

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Low income spend a higher % of their income - therefore inflation is bad (rent/food/gas costs more).

High income save & invest a higher % of their income - therefore inflation is good (their stocks go up).

This isn't some sort of moral or judgmental statement. It's simple math. The more your income goes up over time, the less of a % is needed to cover the basics of food/shelter/energy.

Not quite. Inflation doesn’t make stocks go up Willy nilly, that’s outright silly.

Hack your brain, if there is inflation people are looking for a store of wealth, over the last 50 years this has manifested primarily in real estate and stocks. Institutions that have access to large amounts of credit or flows from the government, receive money from investors. When the printing starts stocks rally for these reasons, its the cantillion effect, those closest to the money printer get richer.

Greedflation does.

Interest returns (including ROI on investments) only help you if you have money in the market. The poor don’t. The poor are also disproportionately affected by inflation, as that causes wage stagnation, whereas regular old inflation is less than interest rates so it is built in protection for capital holders.

Yeah, more great examples of why compound interest is not the only explanation.

I'm struggling to understand. Poor person has $100 dollars in their savings account. Rich person has $10M. Even if both achieve the same returns on their savings (be it through simply interest on a savings account, or through equities), let's say 10%. After just 1 year, the poor person would have just $110, while the rich person would have $11M. The rich person got richer faster in my book. Run the same simulation for 10 years and just imagine the result.

Point being, through the same exact investment vehicle and with the same exact rate, a rich person of course will built more wealth than a poor person. It's just the nature of a percentage-based growth.

The difference though is that generally there is a cap on how much is costs to live comfortably. If someone is so rich that they can live exclusively off interest, then they get to live comfortably and keep their initial investment. Another thread called this reaching escape velocity which I think is an apt term for it.

Well also, you can't benefit from interest if you don't have any money left over.

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