I agree with Michael Needham that all of the evils in his litany are things that should be changed:
A second-shift worker shouldn’t see his hard-earned money funneled to a fledgling corporation. Nor should he be concerned regulations advocated by competitors would force his job overseas. The value of his work shouldn’t be determined by bureaucratic decrees in Washington.
Hard working moms should be confident that energy and food prices won’t erode the family budget simply because one industry lobbied for a tariff or a mandate.
Seniors longing to retire should not be trapped in a system that produces a negative rate of return. By 2030, Social Security will return just 90 cents on the dollar for a single female earning average wages. It is immoral, and seniors deserve the option to do better.
Young graduates starting careers should be confident their degree is worth something more than a mountain of debt.
I could make a much larger list starting with: war should always be a last resort.
The problem with that list is that not one candidate from either party has proposed one thing that would ameliorate any of them. Forget the labels. Liberals are no long liberal and conservatives no longer conservative. The first two sentences of his op-ed get it right:
Washington isn’t broken. It is a well-oiled machine that works for the well-connected and responds to the well-heeled.
In the end, it does not matter who is elected. Whomever it is will fall in line and do as he/she is told.
When the Greeks voted to tell the EU and Germany to go to hell, PM Alexis Tsipras went before his betters.
Donald Trump or Bernie Sanders may think they can do as they please until they are behind the desk in the Oval Office. The present occupant had the same delusions.
Elect an outsider, elect an insider, elect Nicki Minaj, elect Peyton Manning, elect a furry, it is all the same, and the outcome must occur. It is the result of the system that has been built over the years, and it is the logical conclusion.
War is probably the only way to create a different outcome, but even large scale war may be unavoidable. What a wonderful world.
Query. If inflation is also essentially zero, why do seniors need those high rates of return? I understand them WANTING high rates of return, but then that just makes them another special interest group. A wealthier group that votes in high percentages I will grant you, but still a special interest group.
Simple. They are living off of principle instead of the returns. When the principle is gone, they are broke, and broke people do not add anything to the elusive aggregate demand.
TB- So we need to keep inflation and interest rates high enough so they can die with their principle untouched? Let’s be honest here and note that it is the gold bugs and fiat money critics who have been the most critical of low interest rates. If the inflation rate is zero, which they assume it will be if we have a gold standard (LOL), then safe, high returns just won’t be in the picture, i.e., I just don’t see zero inflation rates and Treasuries at high rates happening much.
Steve
There has always been a return associated with fixed income instruments, a product of more than just the inflation rate, steve. It goes from there in the so called term structure of interest rates. The Fed has done its best to manipulate this. The safest return – “risk free” rate (short term govt securities return) – generally is a couple percent, up to, say, three. It’s just a historical market reality. In theory it could be negative if deflation dominates other risk factors.
To gage it solely off of inflation, or posing the question as “why do investors need” a return to live is nonsense. And I seriously question the stated inflation rate, either CPI or deflator. The government has a vested interest in keeping the rate low.
Drew, the government providing a stable investment environment so that people can plan for the future isn’t important. At least not as long as the doctors are still getting paid. Priorities, man, priorities!
“….. the government providing a stable investment environment….”
The great Bobbie Jones is said to have quipped, after seeing a young Jack Nicklaus play, “he plays a game with which I am not familiar..”
Government and a stable investment environment??? That is a condition with which……….
@steve
What nonsense are they filling the heads of today’s youth’s?
First, everything that is supposed to work is not working, or if it does work, it has been accomplished by changing the theory, equations, or definitions to allow for special cases that are not applied consistently through time and space.
When it works in Venezuela, I will listen, but until then, it is bunk.
… gold bugs …
This is intended to be a derogatory term, and is nothing more than a buzzword for a concept you cannot articulate. If you want to sound really intelligent, you should learn where the term originated and the context.
… fiat money …
This is another buzzword, and if applied to Venezuela, you would be correct. In the US, you need to add a number of qualifiers to the term. The US does not just create money. The US financial system creates credit, and when the credit is lent as debt, the US will issue currency to be used for that debt. Hence, the US has a partially credit based money system, but that part is the vast majority.
… inflation rate …
This is a tough one because few people really agree upon what it is. It should be the artificial increase in prices due to monetary distortions, but even this could be disputed. Even agreeing upon a definition does not mean there will be agreement over the application. In addition, some things might have their prices increased as a second or third hand effect of an agreed upon inflationary event.
For economic models, inflation is broken into as many different types as necessary to validate whatever needs validating. Standard inflation becomes CPI when it suits the theory. As I stated earlier, pick one, and it will be applied throughout all time.
… gold standard (LOL) …
Bravo, the “LOL” was creative, and I will take an original thought any way I can get it. With a fixed money supply (gold coins), the gold coins would become more valuable as the economy grew. This would cause more goods to compete for a fixed money supply, and the result would look like deflation. In fact, a dollar would purchase more as the economy.
The money supply would only grow when new supplies of gold were found. The fixed supply does not necessarily pose a problem, but there will need to be a decreasing number of smaller fractional coins. Penny gum will soon be one hundredth penny gum.
In this system, a bar of gold would increase in value without any other action. The safest investment would be to purchase gold bars and lock them in the safe. It should be obvious that this would decrease the money supply, but even if individuals were not allowed to own gold, today’s money would appreciate in value.
Money is a store of value, and currency is a medium to transmit that value between parties usually in a voluntary value for value transaction. When a person receives a monetary unit – a dollar, it has a certain value, and that value should neither increase nor decrease artificially. In the fixed gold standard, the dollar will increase in value artificially, and this is no better than a dollar decreasing in value artificially. Most people who agree with the second part of the last sentence are oblivious to the first part.
The imperfect solution in an imperfect world is a mostly gold standard. A money supply that increases in relation to the growing economy, and if you are going to have your economy growth based upon your credit supply growth, you will need a well ordered financial industry. Well ordered meaning, the lions, and tigers, and bears are allowed to mostly do what they want as long as they leave grandma alone.
I realize that this was not an answer you were seeking, but it encompases the gold related nonsense.
… interest rates …
This is the price one must pay for the use of money, or a negative interest rate would be the amount of money it will cost for somebody to store your money. At one time, a checking account had a monthly fee, and certain savings accounts had withdrawal limitations. (I remember a quarterly number, but @Drew know more.) The interest rate is also important under the gold standard portion, but I left it for here. If money appreciates artificially, fewer people will need to risk their money, or conversely, the price to use money will increase.
The Fed is keeping interest rates artificially low, and this is undercutting the price that people can get for the use of their money. The Fed is also able to use its balance sheet interconnected with all the other US bank balance sheets to make money available at artificially low rates. The Fed is a perpetual lending machine.
As used by the Fed, US government, and Nobel Prize winning economists, the inflation rate is a nonsensical construct used to provide whatever answer to whatever question anybody may ask. The only purpose for the Fed interest rate is to grow the money supply, and this should trail and mimic the credit supply.
Once this occurs, seniors like everybody can make rational or irrational investing decisions, and if they invest unwisely, it is their problem. I left what @Drew said for the investment portions.
You can make fun of people who support sound money all you like, but at the end of the day, you and everybody on the left are nothing more than little toadies for Wall Street. Go ahead and try to get rid of them. If President Obama turned into Wall Street’s bitch, what do you think President Hillary Clinton is going to be?
Sigh. Ok, I will mak it easier for you. What it appears that old people, and apparently Drew, want, is for safe assets, which at least includes Treasuries, to provide high rates of return. They also want close to zero inflation. I just don’t see many natural scenarios where that actually happens, so what they are asking for is artificially high rates of return on those safe assets.
Stable investment environment? When has it been more stable than the last 5-6 years? You don’t want stable, you want favorable (for your preferred interest groups).
Steve
re: “Washington isn’t broken. It is a well-oiled machine that works for the well-connected and responds to the well-heeled.”
Washington serves the interests of the White Christian heterosexual married breeders. Same as Yosemite, Yellowstone and the Grand Canyon.
You’re trivializing something that’s very serious. It’s not just “old people”. It’s old people, city governments, county governments, state governments, and insurance companies, just to name a few. As taxes are increased so that various different funds can meet obligations they made assuming 7% or 8% return, even more people will want them even if they don’t know what it is that they want.
Do they want “high rates”? Or do they want inflation +3 or 4%? That doesn’t sound tremendously high to me. Does it to you?
@steve
Actually, @Drew may really care about the old people, or he may be a cold hearted bastard. Either way, he and everybody up the food chain are quite happy to keep the interest rates at zero.
You are the ones who bitch about income inequality. You and every other leftist wants to throw as much free money at the rich, and you all are somehow surprised that they are the only ones getting richer.
Investors pay to use other people’s money, and depending upon what the returns they think they can make from what they are investing in determines how much they will pay. It is probably hard to believe, but investors can actually determine what interest rate they will pay without any intervention from the Fed.
If investigators are not willing to pay anything to borrow, this should be an indication that there is nothing they want to invest in, but in that case, they should not be borrowing anything. It is common sense 101.
“Toto, I don’t think we’re in Kansas anymore.” Uh, oh.
Sigh all you want. They are laughing their asses off while drinking champagne and eating caviar on their yachts your ZIRP is enabling them to purchase. President “Hope & Change” learned the hard way, and Greek PM “Just Vote No” was made an example for any other wayward European leaders.
I will give you one good thing about the glorious Mao and Stalin. At least they killed the useful idiots outright. The worthless sacks of shits you all glorify as leaders will leave you twisting in the wind while they join the swells on the yacht drinking champagne and eating caviar.
You really are showing your ignorance, steve. Inflation only factors into the nominal interest rate. Various risk premia determine the real rate and rate structure. If you inspected a first text in Investment, Chapter: The Term structure of Interest Rates you would know that. You would also know that historical norms are 2-4% for the risk free real rate. You would also know that “risk free” doesn’t mean without risk. It’s the safest among risky alternatives. There is always risk, steve. You and I may disagree about various policy issues, but do yourself a favor and don’t make the mistake of thinking anything is free of risk in financial markets.
For the record, I’ve been quite clear that I think the Feds suppression of the term structure is an abomination. And as Dave points out, it has nothing to do with old people, except they have been told a lie by government, just like SS. It has to do with the more general term “savers,” who expected to live by the usual norms for returns in the lower risk portion of their portfolios. And for pension and other like investors whose portfolio structures must include liquid, and therefore shorter term and now artificially depressed and low yielding assets. Their actuarial assumptions just got shot in the ass. And this is really being done for political purposes, despite self serving exculpatory remarks from the Bernankes of the world. Ever heard Obama criticize the Fed and their effect on savers? Didn’t think so.
Steve,
To add to Dave’s response there are also people who are approaching retirement. Generally the advice is that such people should move their retirement portfolios into more stable investments, but in reality that means essentially little to no return. So people might keep their money in equities longer. These are average Joes, not necessarily the rich. The difference in a percentage point or two can be the difference between running through your principle at age 85 vs age 80.
Secondly, I think you need to consider the consequence of crappy returns – namely more money put in high-risk investments.
Third, Inflation isn’t zero, particularly for the elderly who consume more things with cost growth much higher than CPI – housing and health care in particular.
It might be instructive to consider the two sectors where prices are increasing the fastest: education and healthcare. The former is primarily consumed by the young while the latter primarily consumed by the old.
One of these days maybe I’ll do the bookwork to calculate median real net worth by age bracket over time. My intuition is that the net worth of those under thirty has never been lower. If you think that doesn’t have economic and social consequences, think again.
I also wonder whether income inequality is being driven more from the bottom or the top. When you redistribute from young (who tend to have lower incomes) to old (who tend to have higher incomes), the result would be increasing income inequality. Nowadays there’s a racial/ethnic component to that, too (increasingly, redistribution from young to old will be redistribution from non-white to white) but we never seem to hear much about that.
Drew- Yes, yes. Everything has a cost. Everything has risk. Yes, the historical norm is a bit higher, but we are talking about the current situation. We still have significant underemployment and an economy that is somewhere between growing slowly or not at all. In that case, there is a risk in raising rates. So again, why should we favor the old folks (yes, it affects other institutions but they don’t vote) over the rest of the country?
Andy- I get that, but why are we prioritizing an 85 y/o not running out of principle over a 25 y/o getting a job?
Steve
“Andy- I get that, but why are we prioritizing an 85 y/o not running out of principle over a 25 y/o getting a job?”
I don’t see what that has to do with interest rates. The only point I’d like to make is that low interest rates have negative consequences that can’t be wished-away. The penalty on savers is just one effect of many effects (both good and bad) that I don’t think can be deconstructed to an old vs. young narrative.