I'd like to see some documentation that rich people hoard cash. Note that money stuffed into a checking account is still invested - the bank loans it out to people who spend it.
Even so, I seriously doubt wealthy people have non-trivial amounts of money in checking accounts, because the interest paid on them is nearly non-existent. Wealthy people know how to manage their money, and investing it in 0% checking accounts, stuffing it in mattresses, or burying it in tin cans are all terrible investments.
Drug dealers wind up with large blocks of cash because they have difficulties laundering it so they can invest it. The idea that anyone else has pallets of cash in their basements is sheer nonsense.
I think that is a misreading of the article. A lack of bank deposits constrain lending, so banks need deposits in order to lend.
Banks keep as little cash as possible, because (again) cash does not earn money. They try to lend out as much as possible. The people who borrow money don't sit on it, either, who wants to pay interest on money sitting in a pile?
Federal Reserve Bank of San Francisco, even after massaging the numbers by suggesting measurement issues may account for differences, shows a 30% difference between poor and rich in terms of average propensity to consume.
That paper makes the fundamental error I am talking about. It assumes that if rich people aren't spending on consumption, they are hoarding cash. It then makes economic sense to redistribute that hoarded cash in order to put the money to use.
But the rich aren't hoarding cash. They're investing it. The money is put to use. The rich do not have pallets of cash in the basement.
You'd think that professional bankers would understand this.
Here's the salient quote from the paper:
"Surveys show low-income households tend to spend a larger share of their income than high-income households. Because of this, temporarily redistributing income from the rich to the poor could stimulate consumption and, through that, the economy as a whole."
> But the rich aren't hoarding cash. They're investing it. The money is put to use. The rich do not have pallets of cash in the basement.
As a general statement, that's just as much an assumption as the GP's claim. Where are the studies to back it?
I could certainly imagine situations where someone owns a lot of wealth but never developed the skill to manage it - classical example being inheritance.
Also (unrelated to the argument), "investing" != "put to good use". If an investor chooses the strategy that gives themselves the best ROI that doesn't mean the investment is necessarily beneficial for anyone else. (Except in an abstract "stimulating the economy" sense. But if that is all you want, you could just spend all your money continuously digging holes and filling them again.)
Even putting your money in a checking account causes it to be spent into the economy (as the bank loans it out).
There's no rational reason to borrow money and make a pile out of it.
Even people who operate cash businesses (like casinos) rush to deposit the cash in a bank ASAP.
> If an investor chooses the strategy that gives themselves the best ROI that doesn't mean the investment is necessarily beneficial for anyone else.
Actually, it does mean just that. An investment is giving someone else money to do something productive with that money. That person will take their cut, and so benefit.
Why always hand it over to someone else? You can't say that tons of investment is always a good thing.
Look at the Dairy industry in the United States. Wal-Mart has vertically integrated the dairy industry into itself, as a result, many smaller regional farmers no longer have a market at all since there is no way to compete with someone who is so well integrated that they can SELL AT A LOSS in dairy, yet compensate by making up for it with social engineering via loss-leading.
You CANNOT sit idly by and say that investment is ALWAYS a positive societal good when by definition, the "rational invester" (read: paperclip maximizer for ROI) will naturally tend to converge on creating monolithic structures, which, by their nature as "rational corporate actors" act as, again, paperclip maximizers for profits.
Balance sheets do NOT accurately convey the full story of economic processes at work creating tangible effects in the real world, any more than meteorological climate models do.
If you take into account side effects caused by collectively funded (via rational investment methodologies) creating monolithic industry-consuming behemoths, then the idea the rich are "hoarding money" makes perfect sense.
Wal-Mart in this case is doubling down on automation, and keeping what payroll it pays low, so it's not actually acting to distribute wealth back to those who are so strapped they can't even think of investing, because they need to put the next meal on the table.
EVEN if they could statistically speaking, the most wealthy are the most likely to be able to pick up what stock they'd have to sell, because stock doesn"t put food on the table.
This creates a situation where regardless of who's hand the money is actually in, the outcome is the same. Monolithic businesses will be invested in, they'll integrate until they start creating value deserts in their space, and in order to contribute to continuing growth figures, will optimize away liabilities by minimizing workforce or salary. The only one's benefiting being those already on board.
Does it "GENERALLY" work well though? Yes and no. Yes, given the absence of any actors large enough to create value deserts through excessive vertical integration? Yes! It does!
No. I'm the sense that that isn't what the market seems to produce though. Companies will diversify, merge, or employ externalization of negative outcomes EXACTLY to accomplish making themselves the best looking target for investors.
At some point, enough has to be enough. The economy is one of the few process spaces where eternal growth is EXPECTED. No living system constrained by finite resource and time CAN grow indefinitely without causing major systemic upsets.
An equivalent solution to what Wal-Mart is doing could be achieved with networks of smaller less "fiscally efficient" distribution centers doing business with fewer monolithic industrial behemoths. This keeps the barrier to entry lower, leads to more opportunities for job creation, and increases financial mobility overall. This is something that CAN't exist with uncontrolled maximization of ROI by investors, and profits by corporation. At some point enough HAS to be enough.
Maybe I'm not an economist, but I've seen enough complex systems to recognize when blind spots exist in current modeling. This is something I see never get addressed.
I didn't say it was. I was responding to "beneficial for anyone else".
> value deserts
I'm sorry, but this is nonsense.
There are some sound reasons for redistributing money from the wealthy to the poor. Benefiting the economy because the rich are hoarding money or are incompetent investors is not one of them.
Value deserts in the sense that no competitors can break into the market to capture share, because the market is essentially defined by the entrenched player. Yes it does happen.
Again, look at Wal-Mart and dairy. Alphabet\Google does the same with digital advertising.
I'm not saying people are crap investors either. I'm saying the definition of a "good investor" (maximize fimancial ROI) and a "good company" (maximize financial profit) leads inevitably to market behemoths forming which WILL degenerate the health of the economy as a whole, and drastically increase barriers to entry for smaller players.
A company as a collective stands as much as a danger when it becomes too large as it does a benefit.
A "good company" should not grow infinitely. It should grow as much as is needed to do what it needs to. That is providing it's service to it's community. No living system constrained by finite time and resources can support unceasing growth. The economy is just such a system.
Not really... It's just about a 4th degree argument I'm making.
-1st degree:Real wage growth doesn't happen, because investor behavior wants the most money back to them from a company.
-2nd degree: A company will try to trim "waste" by cutting immediate liabilities to the lowest they can to maintain requisite Talent.
-3rd Degree: Talent is going to go where the biggest bucks can be made, and that will be the biggest market behemoth which exists currently. The infusion of investor capital exaggerates buying power to acquire and retain Talent which would be necessary for smaller competitors to get a leg up against the behemoth"s entrenched position. This leads to value deserts, which adversely effects industry as a whole.
-4th degree: Smaller competitors die in value deserts. supply goes down, demand stays the same or goes up. Prices go up, profit goes up, return to 1st degree.
Wal-Mart captured a great deal of investor capital. In order to keep itself looking tempting to investor's it has to grow (diversify), cut liabilities (minimize wage growth, decrease employment/payroll via automation, and minimize benefits expenditures through scheduling shenanigans), or do BOTH at the same time by vertically integrating their supply chain and using loss leading's attendant benefits to undercut small producers; this pushes them out of the market, jacks up prices on the commodity when supply goes down, thereby increasing profits, thereby drawing more investment capital. Start the cycle again with the next industry.
It's called a positive feedback loop, and in nature, if they aren't compensated for, bad things happen. It just so happens that this one has a multi-generational period, so no-one has lived long enough or paid enough attention to get upset about it. If they did, I just haven't found their paper, bit I have the feeling people are starting to notice, even if they can't articulate it.
It goes back to wage growth because of the link between 1 and 2. 3 and 4 are what cause the actual societal\market damage. You can't "solve" the problem without fundamental rethink on the axiom that kicks off all of this, which is "the best investment is to dump as much money as possible into the fastest growing company", which has a sub axiom of "growth without bounds is acceptable and to be encouraged".
It ain't straightforward, but nothing about economics seems to be. If there is a glaring flaw, please enlighten me. I REALLY want to improve my understanding.
> As a general statement, that's just as much an assumption as the GP's claim. Where are the studies to back it?
Never in my life have I ever heard of anybody (other than criminals and a few mentally ill people) with a cash hoard. Nor have I ever known anyone to do this. I've never seen any newspaper article about anyone with a hoard. Never a magazine article profiling millionaires with cash hoards. No books about it.
And yet, it is apparently conventional wisdom that wealthy people hoard cash as a general rule.
I don’t think anyone assumes anyone is hoarding cash. It’s just a time to deployment question.
A dollar flowing into a wealthy person’s account may take a week or two to get loaned out or fielded into an investment, and another week or two to pay the investment manager or begin facilitating the purchase of goods and services. A dollar dropped into an empty checking account may buy food that day from an establishment which will sweep it out to a supplier the next day.
Our financial system is efficient, but the last time I saw a statistic for the figure, it takes about two weeks for the average checking account deposit to get turned into a mortgage.
Consumed money is more stimulative of the economy then money that is invested, because consumed money first circulates 1 or more times, and then is likely invested as well, whereas directly invested money doesn't circulate before it's invested.
It's like saying that a formula 1 race isn't faster then a car parked on the start line because it ends up at the same place. It ignores the times the car goes around the track.
It also presumes that a choice of an investment is as good as the free market in distributing capital effectively.
Imagine a world where everyone put 99% of his income into investments. There would be nothing to invest in, because nobody was consuming.
And by this definition the poor are definitely putting the money to better use because they cause the economy to grow by spending it all.
The rich are currently facing an asset price inflation because there is too much money wanting to be invested and not enough consumption for all those assets to be put to good use.
Even so, I seriously doubt wealthy people have non-trivial amounts of money in checking accounts, because the interest paid on them is nearly non-existent. Wealthy people know how to manage their money, and investing it in 0% checking accounts, stuffing it in mattresses, or burying it in tin cans are all terrible investments.
Drug dealers wind up with large blocks of cash because they have difficulties laundering it so they can invest it. The idea that anyone else has pallets of cash in their basements is sheer nonsense.