9/17/2007

09-17-07 - 5

Basically any time there is an opportunity for someone in power to use a system to their own benefit, they will do so. It's just human nature.

The latest one I've been thinking about is inflation and the fed prime rate. I certainly don't understand money supply well at all, but something occurs to me : 1. Inflation (the CPI) in the US has not been over 5% since 1983, which is a very long controlled span, despite several economic cycles and recessions that might normally be periods of inflation (see US Historical Inflation ) ; 2. If the reported inflation rate (CPI) was lower than the true cost of living inflation rate, that would be a big benefit to corporations.

Why is it a huge benefit for corporations (& hedge funds & large investors in general) to pretend inflation is lower than it really is?

1. They get a low fed funds rate which makes investment capital cheaper than it should be. At the same time this hurts ordinary poor people with savings accounts because it generally correlates directly with savings return rates. In general when the fed rate is low, that's a huge boost to financial institutions, but bad for ordinary savers. Whenever the "economy grows" that means that large corporations and banks grew. Now of course in theory that wealth spreads out as it creates new opportunities and jobs and so on.

2. Benefits like social security, welfare, union salaries, etc. are generally set by the CPI. If the CPI is not increasing to track actual costs of living, these people are all getting shorted. More generally, employers can set wages, and the government can tout the fairness of wages if they generally track with the CPI. The employers' wealth grows proportional to the economy's growth, but employee's wages only grow proportional to the CPI. For example, the minimum wage and poverty line can be set far lower than they should be.

It's an interesting question to me whether wealth and poverty and necessarilly connected. The US seems to be the richest country ever by far, and we have massive income inequality and severe poverty. In the EU, the UK is by far the best of financially, and they are also the country with the most people in poverty and the worst conditions of poverty. Obviously it seems that the country's overall financial success (measured in terms of total wealth or average wealth, anyway) is correlated to income inequality. The question is whether people in poverty are necessary to this, or whether that's just a bad side effect of a laissez-faire system which encourages entrepreneurship. For example, if you just took the poor people away, would that hurt the economy? Would some of the middle class be forced down into poverty by system forces? Is it possible to have a dynamic growing economy without a massive base of poor people doing the low-skill low-wage jobs?

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old rants