Thread by @doctorow

The received wisdom among economists is that the US's historical low interests rates are driven by high savings by aging boomers who are getting ready for, or in, retirement.

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The idea is boomers have salted away so much cash that banks don't bid for their savings, so interest rates fall.

But at last week's Jackson Hole conference, a trio of economists presented a very different explanation for low interest, one that better fits the facts.

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In their @nberpubs paper "What explains the decline in r∗? Rising income inequality versus demographic shifts," @AtifRMian (Princeton), @ludwigstraub (Harvard), and @profsufi (Chicago) show how inequality, not demographics, is to blame for low rates.

kansascityfed.org/documents/8337…

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The problem with the "boomers have so much in retirement savings that interest rates are low" theory is that boomers are incredibly unprepared for retirement. There's a small cohort - ~10% - of very well-off boomers sailing into their sunset years. The rest? Fucked.

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It's true that boomers put in most of their working days before wage stagnation kicked in, that they paid hilariously low university tuition, and enjoyed low housing costs and substantial down-payment assistance from their New Deal-subsidized parents.

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BUT! They also were the earliest cohort of workers that were forced to rely on gambling in the stock market for their pension, and their savings were eroded by multiple crashes that revealed them for the suckers at the poker table.

pluralistic.net/2021/01/30/mem…

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Their homes have hugely inflated values, but they're being liquidated to pay for eldercare, medical debt, and their kids' and grandkids' usurious student loans and otherwise unattainable down-payments.

gen.medium.com/the-rents-too-…

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So we can't really say that low interest rates are being caused by an aging population with high retirement savings, because while the US population is aging, it does NOT have high savings. Quite the contrary.

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And, as @rbrtrmstrng points out in his analysis of the paper for the @FT, even in places like Japan, with large cohorts of retirees and near-retirees who DO have adequate savings, rates are scraping bottom.

ft.com/content/256acf…

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So why are rates so low? Well, the paper says it IS being caused by high levels of savings - just not aging boomers' savings. Rather, it's the savings of the ultra-wealthy, the 1%, who are sitting on mountains of unproductive capital, chasing returns.

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Making the rich richer is terrible economic policy. Wealthy people simply can't spend all their money - I mean, once Jeff Bezos has bought a superyacht for his superyacht and flown to space, he's still got hundreds of billions in the bank.

cnn.com/2021/05/10/bus…

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An Amazon warehouse worker's paycheck immediately enters the economy - it's spent on groceries, and if the grocer is a local smallholder (and not Whole Foods), that dollar is spent again, on school supplies. The local stationer spends it at the local mechanic, and so on.

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Once a dollar disappears into Bezos's bank account, it is frozen in amber. No matter how many Subzero fridges Bezos fills with vintage Veuve, he'll barely dent his fortune.

pluralistic.net/2021/05/17/dis…

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Those dollars that pile up in the accounts of the wealthy are like oily rags piling up in the economy's garage. They can't be used for consumption, so they're pumped into assets, causing massive spikes in things like housing, raising the cost of living for everyone else.

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But there aren't enough assets around to gamble on - not even after new, idiotic asset-classes like NFTs and freeport shipping-containers full of fine art hit the market - and so the savings pile up, depressing interest rates.

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These low interest rates fuel more borrowing by the super-rich, who can take out loans at- or near-prime, making the money effectively free. These borrowed billions are pumped into asset markets, further inflating them.

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Once the oily rags start burning, the flames blow out the economy's garage door, and more oxygen (cheap money) floods in and causes the blaze to burn higher and hotter.

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Just like a fire can create its own weather system of lightning storms that start more fires, the oily rags the super-rich have filled our collective garage with also set off secondary crises.

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That was made clear by @propublica's #SecretIRSFiles: low rates let the 1% evade nearly all taxation, by allowing them to borrow against assets (tax free) rather than liquidating them (taxed at 20%). So the rich get richer, and the rags pile higher.

pluralistic.net/2021/06/15/gui…

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Boomers may be richer than Gen X and Millennials on average, but only because the top 10% are skew the average. The reality is that we are not in the grips of a battle for generational supremacy - rather, we're fighting a class war.

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The rich - old, young and middle-aged - set the world on fire. High savings cause low interest rates, to be sure, but the savings - like all forms of wealth - are in the hands of the rich, not the old.

eof/

ETA - If you'd like an unrolled version of this thread to read or share, here's a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:

pluralistic.net/2021/08/31/and…