I Still Hate Neil Irwin - part the nineteenth

Once again, Mr. Irwin has been reading my musings? Of course, it helps that he has easy access to arcane (for the average citizen) professional/academic research papers. In this case, a Fed regional paper studying the correlation, and likely causative direction, of wealth/income inequality and the 'natural rate of interest'. Both his report, and the reported on paper, reflect what you've read here over the years: scardy cat holders of excess moolah can't and/or won't turn said funds into physical capital, thus we got the Great Recession when a very lot of that moolah decided to chase the nearly (so far as they were concerned and convinced) riskless residential mortgages.

Both he and the reported paper (at least, as reported) ignore two salient facts:

1 - this process he describes is what drove the Great Recession in the first place, the demand for 'riskless' high returns
2 - economists, even the Right Wingnut cabal, have known since Adam Smith (the real one) and raised to importance by Keynes, that the greater one's relative wealth, the less each additional Bongo Buck is spent on goods and services; it's either horded or invested (Jesus saves; Moses invests)

But, here's his take-away

New evidence suggests high inequality is the cause, not the result, of the low interest rates and high asset prices evident in recent years. That is a provocative implication of new research presented on Friday at the Federal Reserve Bank of Kansas City's annual Jackson Hole economic symposium (which was conducted virtually because of the pandemic).

I could have told you that. Wait, I have. More than once. And it didn't cost you anything.

And the reason, as described here a few times, is that those with excess moolah drive the asset markets, and when they are feeling scardy cat, they turn to 'riskless' instruments. When they tired of Treasuries' returns, they convinced themselves that residential mortgages were almost riskless (thanks Blythe!) and they all jumped in feet first. We now know what happened next. As mentioned in a recent missive, banks are so scared they're sucking up Treasuries, too.

It's not that the high earners increased their savings rates. Rather, they were winning a bigger piece of the economic pie; by the researchers' calculations, the share of income going to the top 10 percent of earners rose to more than 45 percent in recent years, up from about 30 percent in the early 1970s.

In other words, if they be necessary, keeping an ever increasing proportion of the GDP in the hands of the 1% leads to an ever larger pile of moolah chasing returns without a change in MPC/MPS of the wealthy class. Fundamental Supply And Demand means that the price of assets will rise and returns on assets will fall. Econ 101.

"These forces pushing down r-star are probably so powerful that the Fed could never fight against them," Professor Sufi said in an email.

Oopsy! Here's a prediction (which won't likely be tested for some time yet): the fiction of Social Security 'investment' in Treasuries will collapse, and SS will be funded directly without all that hand-waving about instruments and imputed returns and other lies.