Home > economics, modeling, musing > Inflation for the rich

Inflation for the rich

November 7, 2014

I’m preparing for my weekly Slate Money podcast – this week, unequal public school funding, Taylor Swift versus Spotify, and the economics of weed, which will be fun – and I keep coming back to something I mentioned last week on Slate Money when we were talking about the end of the Fed program of quantitative easing (QE).

First, consider what QE comprised:

  1. QE1 (2008 – 2010): $1.65 trillion dollars invested in bonds and agency mortgage-back securities,
  2. QE2 (2010 – 2011): another $600 billion, cumulative $2.25 trillion, and
  3. QE3 (2012 – present): $85 billion per month, for a total of about $3.7 trillion overall.

Just to understand that total, compare it to the GDP of the U.S. in 2013, at 16.8 trillion. Or the federal tax spending in 2012, which was $3.6 trillion (versus $2.5 trillion in revenue!).

Anyhoo, the point is, we really don’t know exactly what happened because of all this money, because we can’t go back in time and do without the QE’s. We can only guess, and of course mention a few things that didn’t happen. For example, the people against it were convinced it would drive inflation up to crazy levels, which it hasn’t, although of course individual items and goods have gone up of course:


Well but remember, the inflation rate is calculated in some weird way that economists have decided on, and we don’t really understand or trust it, right? Actually, there are a bunch of ways to measure inflation, including this one from M.I.T., and most of them kinda agree that stuff isn’t crazy right now.

So did QE1, 2, and 3 have no inflationary effect at all? Were the haters wrong?

My argument is that it indeed caused inflation, but only for the rich, where by rich I mean investor class. The stock market is at an all time high, and rich people are way richer, and that doesn’t matter for any inflation calculation because the median income is flat, but it certainly matters for individuals who suddenly have a lot more money in their portfolios. They can compete for New York apartments and stuff.

As it turns out, there’s someone who agrees with me! You might recognize his name: billionaire and Argentinian public enemy #1 Paul Singer. According to Matt O’Brien of the Washington Post, Paul Singer is whining in his investor letter (excerpt here) about how expensive the Hamptons have gotten, as well as high-end art.

It’s “hyperinflation for the rich” and we are not feeling very bad for them. In fact it has made matters worse, when the very rich have even less in common with the average person. And just in case you’re thinking, oh well, all those Steve Jobs types deserve their hyper-inflated success, keep in mind that more and more of the people we’re talking about come from inherited wealth.

Categories: economics, modeling, musing
  1. November 7, 2014 at 8:07 am

    I’m probably just confused on this, but I always thought the inflation that QE-haters most feared was inflation that would follow the end of QE (not during QE); i.e. inflation that might show up say a year from now.
    And as long as we’re talking economics, I continue to hear a lot of fear of deflation, for Europe in particular. You see any forthcoming concern for DEflation in the US?


  2. Guest2
    November 7, 2014 at 10:13 am

    Neil Fligstein’s background chapter in “The Great Recession” is illuminating from a systems viewpoint. The lack of understanding makes modeling difficult.



  3. Josh
    November 7, 2014 at 10:46 am

    Yes, I hate it when Steve Jobs is the prototypical example of a super-wealthy person. He is unusual in that his wealth came from something that benefited society (even that’s debatable but we do seem to like our iStuff).

    But what about Charles and David Koch whose wealth comes from inheritance and then despoiling the environment, government subsidies and corrupting the political process. Or the Walton’s whose wealth comes from inheritance, squeezing workers and competition, government subsidies, Or Paul Singer and other hedge fund types whose activities of dubious (often negative) value to society. Or Angelo Mozilo … I could go on.

    When Steve Jobs is the example of a wealthy person, it is putting much to positive a face on it.


    • NC
      November 7, 2014 at 3:34 pm

      It must be nice to be able to judge with such conviction. Just so you know, the Kochs did inherit a fortune, but the conglomerate that they run (and that their father founded) produces things of value. They also pay taxes and employ tens of thousands of Americans. If I don’t like Apple, I won’t buy their products. You can do the same. Don’t use fuel that they refine, food grown with their fertilizer, or other products (clothing, plastics, etc…) made from their chemicals. Do you want to be a hypocrite?


      • November 7, 2014 at 3:36 pm

        It’s actually really hard to avoid the Koch brother’s products, they are embedded in so much. Also, just because you do some positive things doesn’t mean you don’t make up for it by being super evil in other ways!

        And yes, it’s is kind of nice. And I don’t even think you were talking to me.


        • NC
          November 7, 2014 at 4:38 pm

          I was actually referencing Josh’s comments, but I am surprised at how vilified the Kochs are. Obama was at least willing to negotiate with the Iranians and Putin. Not so much with the Kochs (who are Libertarians) and Republicans.
          Some of the rich are worthless, but most are hard working people. Having said that, I have no empathy for their luxury inflation. General inflation is a concern, as it impacts those who are already struggling the most. That will likely hit when the job market improves.


      • November 7, 2014 at 4:27 pm

        @NC: I’ll concede I got a little strident. But, I do think that most billionaire’s contribution to the rest of our well-being is less than Steve Jobs’ was. And in many cases, a good argument can be made their contributions are negative.

        Maybe we should start talking about the “deserving rich” and “undeserving rich”.

        My caveat about Jobs is not that I don’t like Apple products. As you note, I can just not by them, which I don’t. My concern is smartphones indirect use of huge amounts of electricity (when you account for the supporting infrastructure). Still, he is more “deserving” than most.


        • NC
          November 7, 2014 at 5:17 pm

          @Josh: I appreciate the concession. I would rather talk about the “honest capitalists” vs the “crony capitalists.” The latter benefit from their connections to the government, whereas the former see a need and fill it. Once you decide that some of the rich are not “deserving,” you make a judgement that Hitler, Lenin, and Mao made. I’m not prepared to do that. There may yet be someone who thinks that all Americans are undeserving.
          Personally, I hope no one begrudges me my little slice of heaven, even if its not the Hamptons. My family worked hard to build it.


        • November 8, 2014 at 7:30 am

          NC said; “Personally, I hope no one begrudges me my little slice of heaven, even if its not the Hamptons. My family worked hard to build it.”

          Yes your family worked hard, but did so on a tilted global playing field made tilted by rapacious US Imperialism. Similarly the Koch brothers may be hard workers but have also had a leg up through that same imperialism and Aggregate Generational Corruption (what their shill scribes call inherited wealth). Wealth that enables them a further leg up in the present day through their power to buy politicians and unfairly maintain and grow their wealth.

          Net problem; the Xtrevilist sociopath big fat red wallets own all of the seats at the policy table while the the common folks thin blue (and nonexistent) wallets have no seats at the policy table while, owing to the menticide, they believe that they do.


          Deception is the strongest political force on the planet.


      • Josh
        November 7, 2014 at 6:06 pm

        @NC: Sorry, the “deserving” and “undeserving” was meant as satire. Those terms are used about the poor.


  4. Josh
    November 7, 2014 at 10:57 am

    I do want to push back on this idea of QE being a great thing for the wealthy, though.

    Yes, it probably did push stock prices up. If so, that helped the balance sheets of rich people. But it really only helped the old rich who are liquidating their portfolios. It hurt the new rich who are still accumulating their (often ill-gotten) gains. They are buying stocks at higher prices (and hence lower returns in the future). It definitely hurt people with bonds who are earning extremely paltry yields. It helped borrowers who tend to be further down in the wealth distribution

    Admittedly, it probably didn’t help the lowest like payday borrowers and extended credit card debt whose rates were probably not affected.

    There may have been some increase in economic activity that increased jobs — that is the avowed purpose. Personally, I think that affect was small but positive.

    But it is not clear that QE was a sop to the rich. I don’t know what its distributional effects were.


    • Auros
      November 7, 2014 at 10:26 pm

      I think your point about the difference in how this affects people who are in the process of trying to collect on their deferred consumption (i.e. past savings), versus those who want to save, is really smart, and is THE major avenue for thinking about who may get hurt in the process of unwinding the Fed’s balance sheet, if they’re not careful about it.

      If you are:

      (A) upper-middle-class enough to be able to save for the long term (IRA, 401k, whatever), and hope to rely more on such savings than on Social Security and other safety-net programs in your golden years;

      and (B) in your prime earning years currently, not old enough that you stand any chance of being able to liquidate much of your currently-inflated assets before they deflate again (assuming there’s ever a “return to normalcy”, which is an open question — see Summers on “secular stagnation”);

      then you stand a pretty good chance of losing from this policy quite badly, because your income during the QE-inflated period will not be any higher.

      You could of course just move everything to short-term bonds or cash, rather than trying to follow a traditional asset-allocation plan where you stick mostly with riskier assets in your 20s and 30s, migrating to lower-risk through your 40s and on to retirement. But basically then you’re trying to time the market — you’re giving up whatever risk premium is available, in the hope of buying back into risk classes after they come down.

      You’re pretty much screwed regardless. Yay!

      It is interesting to note that this analysis probably applies most clearly to 20s-30s “symbolic analyst” types who work in highly-paid professions (technical, medical, legal, etc), but not as business owners — which is to say, the people getting slammed are probably mostly part of one of the Dems’ core demographics, young educated urbanites.


  5. Min
    November 7, 2014 at 1:29 pm

    Hyperinflation of consumption for the rich is a kind of tax on them. But it goes to others, rich and not quite so rich, who profit from producing and selling goods and services to the rich. Here’s a thought. Why not a tax on the rich that goes to everybody, not just the few? By draining money from the top tier economy we would bring down the hyperinflation of the rich, doing them a favor while helping everybody else.


  6. November 7, 2014 at 5:15 pm

    As a naïve little microeconomist, my analysis would get as far as: if you pour trillions into buying certain goods, you drive up the price of those goods and of substitutes for those goods, in rough correspondence with how close the substitutes are. So it is unsurprising that the first-order effect of this policy would be to enrich holders of capital – not by the entire 3.7×10^12, of course, but by some difficult-to-calculate fraction, still a significant amount. There might also be secondary, trickle-down effects, but on the face of it QE sounds like an enormous redistribution of wealth towards holders of capital assets. Surely any accompanying inflation in the price of luxury goods (another substitute for capital assets) undid at most a fraction of this effect.
    Why would Bernanke, Yellen et. Al. want to do this? Let’s suppose they don’t actually favor giveaways to the oligarchy… I guess it was the only instrument they had and they felt the benefits of ameliorating the recession outweighed the harm of redistribution. At best that’s a scary decision. I wish it got a fraction of the anti-redistribution rhetoric of a 3% income tax increase.
    I started writing this 10 hrs ago, got interrupted, now looks a bit redundant with other comments but anyway those are my little micro thoughts.


  7. Auros
    November 7, 2014 at 10:13 pm

    Asset inflation seems like kind of a predictable outcome of any policy that successfully drives down rates, no? I mean, that *has* to happen in the bond market, by definition. It’s the whole point of the policy. Money migrating to chase yield, driving down yields in other asset classes, seems like a totally-predictable follow-on effect. If QE was working, it would be at least in part by shoving money into forms of riskier-than-bonds assets that deliver money into the real economy. e.g. You could buy the structured-finance securities that have been coming out of the renewable energy industry. Most of these aren’t publicly tradable currently, though Mosaic has been around a while, and Solar City is now securitizing some projects. But there’ve been substantial issuances in the form of private deals for quite a while, from companies like Solar Power Partners, which was bought by NRG. The guy I know who was involved in founding SPP is now with a similar firm called SolEd. Metrus Energy basically securitizes efficiency projects.

    To the extent that rich people tried to chase yield just by bidding up the prices of non-productive assets, like art, gold, wine, expensive apartments, and (arguably) the equity shares of large companies… Well, they’ve got nobody to blame but themselves.


  8. November 8, 2014 at 1:06 am

    As with all things macroeconomic, there is very little we can say with certainty about cause and effect. Issues of growing income inequality and rapid luxury goods inflation were trends before the global financial crisis and before Fed QE, so I would say they have other causes. Who knows about the no-QE counterfactual, perhaps that would have disrupted these trends, particularly if there was a large enough disruption to reshape the entire financial and economic structure.


    • November 8, 2014 at 10:28 am

      Good point, Josh. There is very little we can say about cause and effect.

      I think we have little idea what the impact of QE was. When it was started longer-term interest rates went up some (maybe because of anticipated inflation) and then they went down (probably the direct effect of Fed purchases). This has little effect on the stock market. Corporate earnings went up a lot. There have also been large buybacks of stock by companies.Those are the mains thing pushing the stock market up. But I don’t see how QE was a major factor in that.

      I think QE put a lot of money in the economy but it mostly sat around doing little. I think unwinding will be, similarly, less of a big deal than expected.


  9. NC
    November 10, 2014 at 1:28 pm

    @warren celli: Your transmitter needs recalibrating. You were spouting gibberish. Call the mother ship for instructions on how to proceed.


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