And a major reason workers are spent out is because of high rents. If the US would build enough housing in the major employment centers that the highly skilled workers wouldn't spend 90% of their after-tax income on fixed expenses, they'd have more money to spend to drive other businesses.
All the disposable income is being sucked into rents, and eventually that will make the economy run slower and slower, fewer sales to be made, businesses to close, more people to be unemployed, in a feedback loop until all the capital is held on one side of the table and there are a bunch of unemployed people on the other side who are willing to work, able to work, and want to buy things, but have no capital.
You are assuming the answer. (The old phrase for this was "begging the question"). Someone could easily ask "Why don't the landlords, who get all that money from rent, spend it on something, and thus drive growth?" And you can easily answer that: the wealthy spend less of their income, they save more, therefore the high profits from rent increase the savings glut, etc, etc, etc.
But you should state the answer directly rather than assuming it under a layer of indirection.
In your example, aren't you implying that landlords and other wealthy individuals aren't simply not spending, but actually hoarding cash?
Most wealthy individuals aren't holding cash, they put the money in a savings account or investment that has a return. This money appears to be held to most people, but even money in a savings account makes its way back into the economy by affecting the reserve requirements of banks. Its a proportional effect, because reserve requirements are greater than 0% but lower than 100%, but it still contributes.
If they actually are hoarding, the question is why and in the past that is usually because savings returns and investment returns are expected to be negative. In which case, thats the problem to solve.
In theory that money in a savings account or investment vehicle gets circulated back into the rest of the economy, but I think what we're seeing is that cash is tied up in some sort of buffer/holding effect in the financial sector, basically accumulating in ineffective places. The bulk of the money certainly doesn't seem to be circulating through the hands of individuals where it would likely spur more economic activity than we're seeing now.
This is a really interesting observation. I've never heard someone mention a "buffer/holding effect" before, but that makes a lot of sense.
I wonder if it's something like... the average individual spends half of whatever cash they have available every year... but the average business that takes investment lets 6 to 12 months of it sit in accounts. I realize the bank would then loan against the money in those accounts, but is it "turtles all the way down"?
I'll have to refresh my understanding of fractional reserve banking, but I don't think a loan from Bank A being put into Bank B and so on can lead to infinite money supply. If I remember correctly it somehow leads to some multiple of the input money being generated. Here's a Wikipedia article about it:
At some point all the institutions sitting on their money eventually does result in that money being sat on, and not being circulated through the economy.
Money creation in practice differs from some popular misconceptions — banks do not act simply
as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’
central bank money to create new loans and deposits. (...)
Whenever a bank makes a loan, it
simultaneously creates a matching deposit in the
borrower’s bank account, thereby creating new money.
>Most wealthy individuals aren't holding cash, they put the money in a savings account or investment that has a return.
Not necessarily true, given what the yields on savings accounts have been recently. Yes, a completely rational actor will invest capital in whatever market is currently generating the highest rate of return. But people are not rational actors. More specifically, people tend to be extremely loss averse - they will go to far greater lengths to avoid a result of -$1 than they will go to achieve a result of +$1, even though the delta (a dollar either way) is exactly the same for both situations. This loss aversion only gets worse when you scale up the numbers to -$1,000,000 and +$1,000,000.
This is why higher levels of inequality are correlated with lower growth. Capital owning rentiers are entirely happy with a 2% (or less) rate of return, so long as the risk of a negative rate of return is negligible. Meanwhile entrepreneurs who can generate much higher rates of return (but with a correspondingly higher probability of negative returns) are starved for capital.
While you're right the wealthy people don't usually hold all most of their cash in their mattresses or checking accounts, that's not the definition of "hoarding cash" in the context of the story posted here.
In corporate finance and equities analysis, the term "cash equivalents" includes very liquid short-term investments like US treasuries, CDs and money-market accounts.
> If they actually are hoarding, the question is why and in the past that is usually because savings returns and investment returns are expected to be negative. In which case, thats the problem to solve.
Er, no. The question is why companies -- which traditionally need to borrow money to operate -- are keeping large amounts of savings (earning positive but still very small returns) instead of increasing their capital expenditures by building factories, or writing more software, etc.
Land, or housing, Rent are ridiculous in the 20th century. Depending on where you live you may finally get the bad taste of this medicine.
I remember some journals ( it was Financial Times or Wall Street etc type ) making the relationship case. Stating people has actually been making less money when rent is deducted.
The cost of living is high, people used to say this without putting things into perspective. Cost of Foods / Transport and Rent may be high in London, but you do get a higher minimum wages. Compared this some South Asia Countries where Cost of Foods and Transport is low but Rent is exceptionally, and there may be no minimum wages or wages are comparatively low.
Our of the all four cost of living, Food, Transport, Clothes and Home, Home takes the biggest cost percentage. More then 50%. And it happens that only Home; Land, Rent / Property prices is an investment option out of the 4, and are suspected to be driven up and down by market / monopoly / government.
The world needs to start looking into Property market and tax on its profits, both selling or leasing. As well as allowing % of rent to be deducted in tax calculation.
I strongly believe, that anyone making more then the average median income ( so called middle class ) should be able to afford to buy or rent a house, that has heating in winter and can afford a 10 min Hot shower without skimming on their entertainment like movies, and be able to have decent meals a week while making some savings. The world we are at now are having middle class passing more of their wealth into property market and their living standard aren't that much different then lower class.
All the disposable income is being sucked into rents, and eventually that will make the economy run slower and slower, fewer sales to be made, businesses to close, more people to be unemployed, in a feedback loop until all the capital is held on one side of the table and there are a bunch of unemployed people on the other side who are willing to work, able to work, and want to buy things, but have no capital.