Saturday, October 31, 2015

The hamster wheel economy

This is a post about how inflation and the banking sector works, but more importantly is another example for how Universal Basic Income (UBI) solves everything.

The Goldilocks economy
A common buzzword heard on financial news media in the months preceding the 2008 financial crisis was that we were in a goldilocks economy, referring to the balance of inflation vs. non-inflation pressures being neither too warm nor too cool.  That turned out to be a euphemism for "all hell is about to rain down on us".  The slightest nudge of interest rates upward caused the dominoes of the mortgage securitization scams, the Lehman Bros. scam, and the Bernie Maddoff scam to unravel.

The reason a small interest rate hike was the first domino in that chain is that many mortgages had been given to subprime (least creditworthy) lenders at low teaser variable interest rates and the nudge up caused many unaffordable mortgage renewals at the teaser rate expiry.  Directly leading to bank troubles.

The importance of bank health
Banks are generally useful entities.  They let you buy homes with fairly little cash, and provide other useful credit services that can fuel a healthy and growing economy.  Bank failures do negatively affect the rest of the economy.  With that said, heavily regulating them to protect them/prevent failure is important, and ideally, grants by society towards bank profitability is worth avoiding.

The importance of housing
Keeping housing prices high and rising  is critically important to bank health, personal wealth sustainability, and adds economic activity towards home building and improvement.  Our societies have been in structural decline for several years, but this decline is masked almost entirely by the propping up of housing prices.

Everything you need to know about the housing market is in but the short version is that low interest rates is by far the biggest factor for boosting housing prices.  A 6% interest rate lets you afford a $100k home for just $6000 in yearly interest, but dropping interest rates to 3%, lets that same home have the same affordability if sold for $200k (double).  The danger is that if normal interest rates go back up to 6%, then housing prices would fall in half, and most banks would collapse.

The hamster wheel economy
The hamster wheel economy is one where
  • Housing prices must be sustained by
  • low interest rate fueled inflation that sustains
  • Banks, government borrowing, personal wealth, and stock prices (also helps banks and personal wealth) 
If you stop running in the hamster wheel, the hamster that is probably behind you will bite your tail off.

The link between low interest rates and stock prices is partly that profitability is enhanced by low borrowing costs, and healthy banks and personal wealth, but more importantly, from more recent year financial media buzzwords, there's nowhere else to put your money.

The hamster wheel economy is a super precarious state, where the economy is on the brink of collapse when interest rates are near 0, and cannot be increased, and the absurdity of negative interest rates appears not just viable but proposed as necessary.

low interest rate fueled inflation
Deflation has to be avoided because that ruins housing prices and  thus everything else.  Low interest rate fueled inflation is the primary anti-deflation tool, and is also the type of inflation that affects housing costs the most.

QE is a similar anti-deflation policy, that doesn't help housing prices as directly, but helps inflation of assets that help the richer members of society buy houses too... and financial institutions.

Causes of deflation
unemployment and low income employement is a primary cause.  Cheap imports, and productivity fueled cost cutting causing more unemployment and lower income occupations feed the cycle.

The evil of the hamster wheel economy
The hamster wheel economy selects winners.  Namely, those lucky enough to have already purchased a home and stocks, the financial sector, and public company insiders.  This is a demographic that heavily skews older, as well.  The selected losers are those who at best only have the option to buy such assets at precarious hamster wheel high prices (and at greater risk if they collapse).  Obviously, also, high home prices freeze out those still without a home.

Wage inflation (as opposed to low interest fueled inflation) resulting from economic booms significantly benefits the younger skewing demographic that seeks employment, both with better pay and easier work finding opportunities.

The age-based conflict is a topic well expanded in this essay, and an issue not peacefully resolvable without UBI.  But this conflict is made worse by intentional low tax policies eliminating jobs, welfare, education in order to increase hardship so that interest rates can stay low and homes and stocks high.

UBI as a solution to Technological displacement
UBI provides an obvious solution to technological employment dislocation.  Just tax robot owners profits, and distribute the tax proceeds equally to all adult citizens, and then have the citizens pay for robot stuff.  Robot owners get fithy rich.  Everyone else has everything they need, and less reason to complain about not having a job that is not necessary.  We don't need to wait until robots are everywhere for the advantages of UBI. UBI paid through taxes brings huge economic benefits to our society.

The only other theoretical solution to technological displacement is the theory that product prices will fall rapidly along with automation.  This is the deflation that causes our tail to get bitten off.  For one, if cars go down in price to $100, you still need $100 in income to buy one.  The other point is that no matter how much productivity increases, the price of land is not affected as much, and central banks will use every weapon in their arsenal to prevent a hamster flop in property prices.   So if everyone needs to make and sell 50 cars per year to just afford a place to live, and 100 cars per year to afford other basic needs,  its a big problem if everyone is not buying 100 cars per year.  50M cars per year sold in the US would support 500k workers (making an average $10k/year) through the full supply chain.

This theoretical alternative also skews the benefits of productivity increases to those who have accumulated savings in the past (those darn boomers again).

UBI can fight deflation and allow interest rate breathing room
There is irrational (at best) scaremongering that UBI will cause inflation.  If some people choose to stop working, it is likely to improve the job opportunities of those who want to work.  UBI also inherently increases spending and growth in the economy.  If their wages rise too high, then it improves the opportunities to develop automation that replace them.  Another reason that such inflation doesn't matter is any effect that increases spending in the economy increases tax revenue, and so the ability to fund higher UBI to match inflation.

To tie everything to the rest of this paper, UBI stops deflation by stimulating economic growth.  low interest fueled inflation has not stimulated growth and structurally never can alone anymore.  Investment is only made because an idea seems good, and good ideas exist when many people might be able to afford to buy the result of that idea, and do not exist if fewer people can afford anything.  Or the only ideas left are how to cut costs in the face of fewer customers... leading to fewer customers.

A primary cause for our economic decline being structural and permanent is lower birth rates.  Housing prices and economic activity (work) is sustained by increasing population.  Sustainably high birth rates not only create the sustainable housing price increases needed for credit based economy (without artificially low interest rates), but were fundamental assumptions in the creation of socialized retirement policies.

UBI helps banks too
The main reason your home values are staying high is that this is necessary to keep banks solvent.  UBI will help housing demand too, but there is room to raise interest rates to mitigate housing and other inflation.  High home values with higher interest rates is awesome for banks.  Bigger loans at higher interest rates, and a cushion to lower interest rates if home prices ever fall again.

UBI also creates better lending opportunities in general.  Borrowers with a guaranteed income level have much more borrowing security, and that means less risk and higher profitability to lenders.

UBI can't hurt stock returns either.

Recent tax focused analyses of UBI

My original philosophy

Another Central bank option
Another obvious option for (full or partial) funding of UBI is to print money and distribute it in equal share to citizens, as I demonstrated here.

An alternative that may be more palatable to central banks, is to simply issue more government debt to fund UBI, while the central bank repeats its past QE procedures.  QE helps banks and helps government, and central banks like helping both.  An accounting issue with imagining money to buy government debt (QE) is that the central bank is trading an asset (bond) for the imagined money (liability), and so it can pretend its books are balanced, and that when the bond is repaid it will then cancel the money instead of perpetually buying a new one.

If QE is credible, then this maneuvre is equivalent to direct printed UBI funding, without involving accounting deficits, providing free debt to governments, and helping bankers get rich by buying bonds ahead of the fed.

1 comment: