J Grantham on What's Broken

[oddlots]

People now see it is a system for the rich only

http://www.ft.com/cms/s/0/c6260c0c-4...#ixzz1lcGKlvNO

[jk]

Re: J Grantham on What's Broken

thanks for posting that. i've always had a lot of respect for grantham as an economic thinker. it's reassuring to see that such a successful member of the financial world can give serious thought to issues of social equity.

[davidstvz]

Re: J Grantham on What's Broken

I have to wonder... if we somehow knocked off the richest 400 people and doubled the wealth of the poorest 160 million, would the 160 million really be twice as rich? It seems like, the wealthy keep a lot of their wealth in places that don't put pressure on physical supply chains and thus drive up prices. Whereas doubling the wealth of the bottom 160 million certainly would.

I can't seem to wrap my head around this idea and decide one way or the other.

[jk]

Re: J Grantham on What's Broken

I have to wonder... if we somehow knocked off the richest 400 people and doubled the wealth of the poorest 160 million, would the 160 million really be twice as rich? It seems like, the wealthy keep a lot of their wealth in places that don't put pressure on physical supply chains and thus drive up prices. Whereas doubling the wealth of the bottom 160 million certainly would.

I can't seem to wrap my head around this idea and decide one way or the other.

first round effects would hurt prices of financial assets and boost demand for consumption goods, and give a bit of boost to the economy. what is "wealth" for the richest, however, wouldn't remain as wealth for the poor- it would be quickly spent and recycled into the economy.

[oddlots]

Re: J Grantham on What's Broken

Or maybe we'd just close the output gap...

Still your point is well taken: by some miraculous confluence of events* somehow inflation got effectively coralled into asset price inflation over the last 20 years. The middle class swooned at the prospect of making money "like-rich-people" and fell over themselves to sacrifice themselves to banks. When we all go back to making money "like-poor-people" it's going to look a lot more like a Wal Mart Black Friday sale, so I think your highlighting of constraints makes sense. But in the short-medium term... we should have such problems.

* I'm embarrassed to say I can't quite remember how this alchemy was achieved but I do recall it was well explained in Warburton's "Debt and Delusion: Central Bank Follies."

[dcarrigg]

Re: J Grantham on What's Broken

I have to wonder... if we somehow knocked off the richest 400 people and doubled the wealth of the poorest 160 million, would the 160 million really be twice as rich? It seems like, the wealthy keep a lot of their wealth in places that don't put pressure on physical supply chains and thus drive up prices. Whereas doubling the wealth of the bottom 160 million certainly would.

I can't seem to wrap my head around this idea and decide one way or the other.

I'd propose that bottom 160 million would simply pay down debt. The debt would be in the form of mortgage followed by student loan followed by credit card followed by auto loan. Physical supply chains wouldn't be effected.

The median household networth is probably somewhere around $30,000 based on the latest 2004 numbers that the Census Bureau just published in 2012. But if we divide $1.27T by 160M people, that's $7,937.50, which might come out to around $30,000 per household.

Still, I am willing to bet that the housing crisis shot these 2004 numbers to hell, and that, in fact, the median networth of the bottom 160 million American households may now be anywhere from $-10,000 to $+10,000. Debt has exploded; asset prices have deflated.

So this may be a meaningless stat in the sense of discussing wealth disparity between the most wealthy and the common man. It only shows how little in savings and assets and what a huge glut of debt the American family has now-a-days. If the networth of the bottom half of Americans goes negative, then a homeless man with a dollar is worth more than all of them combined.

Anyways, there's a flood of debt out there. If you dropped $8,000 each on 160 million people tomorrow, I would be willing to bet that that it would go to paying down mortgages, student loans, credit cards, and other bills before supply lines would get stretched.

[dcarrigg]

Re: J Grantham on What's Broken

-del-

[davidstvz]

Re: J Grantham on What's Broken

I agree most of the extra cash would initially go to paying debts, but consumption would still rise a little as people would be less in debt. Even if they do pay off their debts, what happens when they can spend freely?

I guess what I'm getting at is, oil energy is sort of the root cost in the economy. Does a rich person consume less oil per dollar of consumption than individuals in the bottom 160 million group? How does the government's oil per dollar of consumption fair (since the government is such a huge spender, it could spend enough to affect supply)? In short, does everyone's dollar spend the same way?

I'm guessing that it doesn't and anyone who thinks fixing problems is as simple as "tax the rich" is missing the fundamental physical limitations underpinning the economy. I could be dead wrong though.

[dcarrigg]

Re: J Grantham on What's Broken

I agree most of the extra cash would initially go to paying debts, but consumption would still rise a little as people would be less in debt. Even if they do pay off their debts, what happens when they can spend freely?

I guess what I'm getting at is, oil energy is sort of the root cost in the economy. Does a rich person consume less oil per dollar of consumption than individuals in the bottom 160 million group? How does the government's oil per dollar of consumption fair (since the government is such a huge spender, it could spend enough to affect supply)? In short, does everyone's dollar spend the same way?

I'm guessing that it doesn't and anyone who thinks fixing problems is as simple as "tax the rich" is missing the fundamental physical limitations underpinning the economy. I could be dead wrong though.

Everyone's dollar doesn't spend the same way. I think recent studies in Canada have shown the top 1% of income earners to use 6 times the oil of the bottom 10%. In the U.S. that disparity is probably wider. If you're running a gulfstream, yacht, and multiple large households, you're using some oil. But the very top 400 can only burn so much, so my guess is, on a per-dollar level, it's somewhat less. It would be interesting to do an empirical study on this, actually. There's another dissertation idea for someone out there in a resource economics program...

But I still doubt that a one time $8,000 per capita infusion would break physical economic limitations. If anything, fixing the general problem is not as simple as "tax the rich" because $8,000 isn't that much spread over the bottom half. Put another way, taking all of the cumulative wealth of the top 400 and distributing it to the bottom 50% would be insufficient to erase total credit card, home equity loan, and student loan debt.

Consumption levels have room to rise. We're not at peak everything yet. Will it bring peak-cheap-oil more quickly? Maybe. I suppose it depends on what timeline you like to take your inevitabilities.

But that is not to say that "tax the rich" couldn't be a component of a bigger solution. And it could help close the budget deficit. And the rates in the 90's didn't seem to kill business. So I don't understand the visceral aversion to the concept by some. Some people act as if the rates set under our last President were handed down on tablets from Mt. Sinai. Another few percent won't kill anyone in the stratospheric income brackets.

You know, short of pushing for energy efficiency and energy independence, coming problems are not so insurmountable. At least that's my take. There are ways to fix them without going to radical extremes. And contrary to what media hype would have us believe, neither of the last two administrations were so radical or extreme. Nixon affected more change than both of them combined. So did Reagan. Things are just out of balance now. The problem is that policymakers seem hell-bent on maintaining a status-quo that is not working for the majority. It's political paralysis. And it's everywhere. And the more integrated a global economy gets, the harder it is to change anything. Everything becomes hard and inflexible. Pressure builds until it breaks. Thus is the nature of integrated, fragile systems.

[davidstvz]

Re: J Grantham on What's Broken

6:1? The very rich don't sound so bad in that light. I'm not so averse to taxing the rich, but people should be aware of the limitations of doing that. If we are going to tax the rich, send the taxes into infrastructure that will solve our energy dilemma in other words.

[dcarrigg]

Re: J Grantham on What's Broken

6:1? The very rich don't sound so bad in that light. I'm not so averse to taxing the rich, but people should be aware of the limitations of doing that. If we are going to tax the rich, send the taxes into infrastructure that will solve our energy dilemma in other words.

Just to reiterate, that was the top 1% in Canada, not the Forbes 400 (top 0.00013%) in the USA. I'm sure for these few individuals, the ratio's higher.

In general, though, your point remains valid.

[davidstvz]

Re: J Grantham on What's Broken

Ah. I wonder what methods of calculating they used. They must have included direct consumption of finished goods as a basis. I wonder if they included anything more than that. If a rich guy hires 10 people to wax his boat collection, do the wages go toward his oil consumption or the employees, or both? Not an easy thing to calculate.