Tuesday, August 27, 2013

Inequality, Savers & Monetary Policy

Mike Konczal at Rortybomb denies that what he calls "expansionary" and what the rest of us call inflationary monetary policy increases inequality. He does so with two arguments.

The first is that such policy increases growth, an assertion which is not really an argument against the causal connection, but merely against the possible conclusion that such a policy is bad. It is the equivalent of "denying" that eating a lot of food with high calorie content makes people fatter by saying that such food tastes really good. It may be an argument against avoiding such action, but it is not an argument against the existence of that causal connection.

The other is that opponents of inflationary policies allegedly contradict themselves by both claiming that it benefits the rich and that it hurts savers. Savers are rich, he claims, so both assertions can't be true, and he thinks that only the assertion about savers is true.

He is right that there are some rich people who are hurt from such policies, namely those who are too stupid, excentric and/or timid to have their wealth invested in anything but physical cash and/or bank accounts and/or treasury bills.

However, very few rich people are like that. Instead, they have most of their wealth in stocks or other assets that rise in value from such policies. Because of that , it is clear that the net effect of such policies is to increase inequality.

But doesn't this mean that most savers benefit from inflationary policies? No, because "saver" isn't synonymous with rich, and less well off savers have more of their savings in assets whose real value is reduced.

Moreover, it should be noted that though even for stocks, it isn't unambiguosly so that people with a preference for such investments gain. Existing stockholders gain as the value of their assets rise, but aspiring stockholders lose. Higher stock valuations today mean that people who wants to buy stocks will receive a lower dividend yield and limit future value increase.

Higher stock prices makes those who are already rich even richer, but it makes it more difficult for people who wants to become rich, or simply just secure a decent retirement. Because of that and the distinction between the existing rich and those who aspire to become rich, there is no contradiction between saying inflationary policies benefit the rich and hurts savers (even savers who invests in stocks or other fixed assets).
This implies that such policies, in addition to increasing inequality, reduces social mobility.


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