I am not anywhere near a financial guy or a quant, so I will need time to digest this. But on the surface, it seems this is an equation with constraints and the feds are using some form of Lagrange multiplier (financial repression?). This means the critical points for spending, outstanding debt, (g-r) or (m-r) would be subject to some ideal value or limit. Now, if private investments for higher-income households get a bubble effect from this (to keep m higher?) and lower-income households languish with the repressed interest rates r, the same government that is looking to provide jobs (infrastructure, higher GDP) is also increasing the inequality gap. I love irony but not here. If the government makes a patch job of increasing taxes on the higher-income households, wouldn't that diminish the capital base of the "rich" from which return m can be generated and eventually lower the allowable gap m-r and any future spending program?
What is the projected number of "rich" as in not really wealthy but potential equity participants as we are encouraged to sock away 401K and IRAs (because surely by fear of inflation, the retirees will have to invest their retirement accounts as if they are "rich", yet once they get to RMD - required minimum distributions, the tax factor above will come to haunt them.
Meanwhile, some of the "value" stocks are doing buybacks and borrowing heavily to prop up their dividends so they appreciate abreast the growth stocks - i.e. join the stock market party?
Before I wrote this, I thought I needed a pencil to try to follow the math, now I am just looking for a spoon. I think my teeny brain just splattered on the floor.
Ha! Very good observation about the link between keeping m high and encouraging owners of capital to invest and inequality. In fact, in our current world, capital is owned by only the upper half of the population and depending on the country, highly concentrated in the top 10% and top1%. MEanwhile, the majority of the population will earn income which is essentially linked to inflation (at best). And the savings they have are typically predominantly invested in savings accounts and bonds, so they earn r. The government needs to create conditions in which m is high in order to be able to finance excess spending. But it also needs r to remain low, thus reducing the growth of savings for most people and the rate at which wages increase. Thus, a tendency to excess spending by t he government leads to higher inequality in the long run.
One way out of this mess is to tax the rich and give it to the poor. Even Thomas Picketty has recently shown that this doesn't help alleviate income inequality. To top things off, it reduces the availability of capital for investments which should increase m, but lowers the overall tax revenues from capital gains taxes, business taxes and income taxes since less capital is employed for growth. This, on average leads to higher government deficits and an incentive for governments to repress r even more. In an abstract way, that is what happens in countries that go overboard with income redistribution such as the former communist countries (but not Sweden etc. which are doing fine).
A way out of this misery is to encourage everyone in the population to invest in stocks and earn m. This is effectively what governments have been doing for decades now through pension plans and education in retirement investing. There is some progress visible in household portfolios, particularly in countries with low equity market participation such as Italy or Germany, but not much. And of course, by encouraging general participation in equity markets, more investors with less savings are exposed to the bubbles and bear markets in equities which more long-lasting consequences for their financial wellbeing.
If the real interest rate is greater than zero (r >0), the purchasing power of the investors would increase (hence their wealth would increase). At the same time, if the GDP growth is zero investors would not find better opportunities elsewhere in the economy (risky investments). So why would investors view new issues as part of Ponzi scheme?
Also, governments could keep printing the money to repay debt and stimulate the economy for growth. Once the desired economic growth is achieved government could start issuing new debt to control unsustainable growth and inflation.
Yes, if r>g there is no ponzi scheme, but the government constantly increases its debt/GDP ratio as soon as it borrows. As for printing money to finance additional growth, I will leave that to you to figure out what is wrong with that suggestion.
One issue with this model is that it assumes the marginal return on every unit of money spent by the government remains constant. It is this fallacy that led China to build highways to ghost cities and America ending up with government cheese. When fiscal policy is involved it tends to be so large compared to its target market that the effect of diminishing returns kicks in really quickly (which means the practical m is could be much lower than the theoretical m).
I am not anywhere near a financial guy or a quant, so I will need time to digest this. But on the surface, it seems this is an equation with constraints and the feds are using some form of Lagrange multiplier (financial repression?). This means the critical points for spending, outstanding debt, (g-r) or (m-r) would be subject to some ideal value or limit. Now, if private investments for higher-income households get a bubble effect from this (to keep m higher?) and lower-income households languish with the repressed interest rates r, the same government that is looking to provide jobs (infrastructure, higher GDP) is also increasing the inequality gap. I love irony but not here. If the government makes a patch job of increasing taxes on the higher-income households, wouldn't that diminish the capital base of the "rich" from which return m can be generated and eventually lower the allowable gap m-r and any future spending program?
What is the projected number of "rich" as in not really wealthy but potential equity participants as we are encouraged to sock away 401K and IRAs (because surely by fear of inflation, the retirees will have to invest their retirement accounts as if they are "rich", yet once they get to RMD - required minimum distributions, the tax factor above will come to haunt them.
Meanwhile, some of the "value" stocks are doing buybacks and borrowing heavily to prop up their dividends so they appreciate abreast the growth stocks - i.e. join the stock market party?
Before I wrote this, I thought I needed a pencil to try to follow the math, now I am just looking for a spoon. I think my teeny brain just splattered on the floor.
Ha! Very good observation about the link between keeping m high and encouraging owners of capital to invest and inequality. In fact, in our current world, capital is owned by only the upper half of the population and depending on the country, highly concentrated in the top 10% and top1%. MEanwhile, the majority of the population will earn income which is essentially linked to inflation (at best). And the savings they have are typically predominantly invested in savings accounts and bonds, so they earn r. The government needs to create conditions in which m is high in order to be able to finance excess spending. But it also needs r to remain low, thus reducing the growth of savings for most people and the rate at which wages increase. Thus, a tendency to excess spending by t he government leads to higher inequality in the long run.
One way out of this mess is to tax the rich and give it to the poor. Even Thomas Picketty has recently shown that this doesn't help alleviate income inequality. To top things off, it reduces the availability of capital for investments which should increase m, but lowers the overall tax revenues from capital gains taxes, business taxes and income taxes since less capital is employed for growth. This, on average leads to higher government deficits and an incentive for governments to repress r even more. In an abstract way, that is what happens in countries that go overboard with income redistribution such as the former communist countries (but not Sweden etc. which are doing fine).
A way out of this misery is to encourage everyone in the population to invest in stocks and earn m. This is effectively what governments have been doing for decades now through pension plans and education in retirement investing. There is some progress visible in household portfolios, particularly in countries with low equity market participation such as Italy or Germany, but not much. And of course, by encouraging general participation in equity markets, more investors with less savings are exposed to the bubbles and bear markets in equities which more long-lasting consequences for their financial wellbeing.
If the real interest rate is greater than zero (r >0), the purchasing power of the investors would increase (hence their wealth would increase). At the same time, if the GDP growth is zero investors would not find better opportunities elsewhere in the economy (risky investments). So why would investors view new issues as part of Ponzi scheme?
Also, governments could keep printing the money to repay debt and stimulate the economy for growth. Once the desired economic growth is achieved government could start issuing new debt to control unsustainable growth and inflation.
Yes, if r>g there is no ponzi scheme, but the government constantly increases its debt/GDP ratio as soon as it borrows. As for printing money to finance additional growth, I will leave that to you to figure out what is wrong with that suggestion.
One issue with this model is that it assumes the marginal return on every unit of money spent by the government remains constant. It is this fallacy that led China to build highways to ghost cities and America ending up with government cheese. When fiscal policy is involved it tends to be so large compared to its target market that the effect of diminishing returns kicks in really quickly (which means the practical m is could be much lower than the theoretical m).