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Thursday, May 1, 2014

Piketty, Krugman, Bernanke: it's a really interesting topic

So I was reading a review at the Guardian on the new book by Piketty, which seems very interesting though probably not something I'd bother to sit down and read.

But here was an interesting sentence from that article:
Piketty's argument is that, in an economy where the rate of return on capital outstrips the rate of growth, inherited wealth will always grow faster than earned wealth.
Thus eventually the rentier class ends up owning the entire country. (I guess in an ideal world you should attack that process by increasing the power of the working class through unionization, but it's not as if the rentier class will ever acquiesce to that and it's not as if the working class in general has that much Marxist class-consciousness anymore.)

Anyway, the point though was I was intrigued with the inequation given in the sentence above.

Because Gavyn Davies has a post up at FT about the OECD's report on the secular flattening of interest rates. This is something that (I dunno for sure) Krugman's been on about, and Larry Summers has apparently mumbled about too though nobody should care what that arrogant clown says.

The interesting thing there was this chart:

And so you get certain people saying the long secular drop in bond yields is about to reverse, yadda yadda.

But that's not happening yet, and cos I like simplistic supply-demand theories I kinda have a thing for the synthesis of Bernanke's and Krugman's arguments that the trend to zero is a supply-demand problem; I dunno whether it's due to an excess in savings, or a lack of loan supply, but I guess if you have a supply-demand inequality, that should drive movement in real rates, no?

So here's what I think is the interesting idea that I'd like to think more about.

#1, maybe the rentier class has now confiscated so much wealth that they no longer have sufficient places to extract guaranteed rents? Thus the return on rent approaches zero, and you're not going to see that change, because it's not as if it makes much more sense to transfer wealth into stocks already valued at 18x. Meaning bond yields never go up from here, because there's too much money that will always want to collect rent.

#2, if the real return on capital (~0%) is now much less than global growth (~4% or something?), does that now mean that Piketty's inherited wealth will now begin to diminish relative to earned wealth?

Or maybe the smarter thing for that wealth to do would be to get out of passive renting and into active investment in productive endeavour, now that growth is above real rates?

What happens when growth is above real rates, anyway?

I don't have any answers, I've just found that I really like to think about this topic, and that it really is an indication that something is different this time and only a fool would stick to old 20th-century models of how economies work when we're obviously down the rabbit hole today.

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