Uh huh. And which part of the published theory on cherry-picking predicted that would not happen? — Isaac

Well, if a (psychological) "theory" predicts both a behavior and its contradictory, it ain't a scientific theory now is it (unfalsifiable) - a theory that explains everything explains nothing. Good question nevertheless! Please continue.

if a (psychological) "theory" predicts both a behavior and its contradictory, it ain't a scientific theory now is it (unfalsifiable) — Agent Smith

Not at all, it predicts cognitive bias in those unaware of the issue and less so in those aware of it. Easily falsifiable by showing a general lack of cognitive bias in those unaware of the issue and a greater effect in those aware of it.

Not at all, it predicts cognitive bias in those unaware of the issue and less so in those aware of it. Easily falsifiable by showing a general lack of cognitive bias in those unaware of the issue and a greater effect in those aware of it. — Isaac

I thought you'd say that! However, what's odd about it is that it amounts to saying the cure itself is a disease! Please continue.

I by and large agree with the point you're making so these are two quibbles but I think important enough to mention.

1. I don't know about the FED but full employment is not a goal of the ECB, that's solely price stability (which is my biggest gripe with ECB policy, see 2).
2. Price stability/inflation control was sold as necessary for growth and to stave of crises, which it never did, yet you assume we need to control inflation. Only hyperinflation is an issue in my view. That's not to say there aren't immediate political policy concerns to act on it but I disagree this has to be monetary policy.

simply look at the percentage of all equities held by the top 0.1%, 1%, and 10% wealthiest individuals in developed economies. Rising stock values inflate the value of assets largely held by the wealthy. — Count Timothy von Icarus

Yes.

Corporations borrow money— cheap money— and this increase their debt. Record levels of corporate debt. Where does this money go? The same question can be asked about subsidies, bailouts, and tax cuts.

They often make record profits— and where do the profits go anyway?

The answer is: roughly 90% of net earnings are distributed to shareholders in the form of dividends and buybacks.

Stock buybacks are also done with borrowed money and tax cut savings.

When it comes to bailouts, as we all saw in 2009, the top executives end up with millions of dollars of compensation— far more than the average worker. The current ratio of CEO pay to average worker pay is about 350:1.

All of this is justified by trickle-down economics. If you favor the supply-side (the owners/employers/corporations), you make sure you cut their taxes, give them cheap loans, and if things get too bad you bail them out through QE and fiscal gifts — because they’re too big to fail. This is basically the last 40 years of neoliberal policy — ironically the age of “free markets” and “small government.”

The result has been, predictably, the wealth inequality you describe, monopolization, and corporatocracy. But it’s really a power inequality. And the bigger that gap becomes, the worse things will get.

The Fed raising interests rates won’t change a thing. Except make the 90% more poor and make it harder to buy a house and take out loans. It’ll saddle even more people with ridiculous levels of harder-to-pay off debt.

Good quibble. Yes, I was thinking more of the Fed than the ECB. In terms of inflation, I agree in part. High inflation isn't as apocalyptic as it is made out to be. Indeed, there are some good things about it:

1. Less wealthy households tend to have significantly higher debt to earnings and debt to asset ratios. This means that inflation, which erodes the value of their debt, can help with inequality (obviously a lot of other factors come into play).

2. High inflation isn't as huge issue so long as increases in wages keep up and inflation is predictable. Neither of these hold though; despite cries about a labor shortage, wage growth is not keeping up with inflation. Notably though, early on in this inflationary period, wage growth for the lowest earners was actually outpacing inflation by quite a bit, representing the largest real wage gains for low income workers in decades. This is no longer the case though, they are losing those gains.

That all said, because the massive amount of leverage employers have built up over the past several decades due to globalization and the ability to "off-shore" jobs, large increases in migration (and thus the supply of labor and demand for housing), and automation, I don't think wages are likely to keep pace with sustained high inflation.

Inflation also hurts retirees most, since they are likely reliant on pensions that are hurt by inflation and fixed income investments that lose value and real returns as inflation grows. Since the US electorate is dominated by older voters, this means there will be huge pressure to whip inflation.

So, my point isn't so much that inflation itself is the biggest issue facing the economy, it's that it is the most salient issue politically, and that here the interests of the wealthy and every one else diverges. Higher interest rates that reduce inflation might be the best policy for the bottom 90%, but it will be very detrimental to the price of equities, which are overwhelmingly held by the wealthy. I think this explains why responses to inflation remain fairly anemic despite public outcry over rising prices. And while inflation can be temporary, the effects of millions of Millennials buying their first homes during a period of 20-30% annual price increases in many markets can hurt growth for decades.

The Fed raising interests rates won’t change a thing. Except make the 90% more poor and make it harder to buy a house and take out loans. It’ll saddle even more people with ridiculous levels of harder-to-pay off debt.

Research on the effects of long term low interest rates appears to show that they are a major driver of inequality. This is something that was only investigated recently, because low rates were thought to be fairly benign.

High interest rates aren't the worst thing in the world. Think about the effects on housing. When interest rates on mortgages fall, home prices get bid up because people can afford larger mortgages. What we saw early in the pandemic was historic, rock bottom interest rates helping to spike home prices. Now, would you rather have a large principal at a low rate or a lower principal at a high rate? If your monthly payments are equal, you might want the higher rate because you can refinance when rates fall. You're stuck with the high principal and if prices fall you end up underwater. Yes, you build equity faster with a lower rate, but the trade off is less opportunity to refinance, which in some cases is not in homeowner's favor.

In terms of other asset classes, I'd argue the middle class is much better off with higher rates. They can get out of the stock market, where they are at a massive informational disadvantage, and get their yields from bonds. There is also the nice advantage of bonds actually generating economic activity, while money thrown at equities outside new offerings does very little to generate investment.

Research on the effects of long term low interest rates appears to show that they are a major driver of inequality. This is something that was only investigated recently, because low rates were thought to be fairly benign. — Count Timothy von Icarus

They are— yes. Why? Because it ultimately leads to increased stock prices, and the top 10% own more than 80% of the stocks. So that will increase their wealth. Meanwhile the 90%, whose real wages have stagnated for decades, simply have less interest to pay on mortgages and credit cards and car loans.

That doesn’t mean raising interest rates will help either. The wealthy will find alternatives. They will be fine one way or another. If workers wages rise 5%, inflation goes up 8% — they increase the prices of their product. If stocks take a dive, they’ll invest in bonds or commodities or emerging markets. Or lobby the government for more aid, or more tax cuts, or find a way to avoid paying taxes altogether. Plenty of options for the wealthy — they will do just fine, and inequality will continue to rise long after the Fed hikes rates.

Real wages have continued to stagnate/decline, and now the borrowing/debt that fills in the gap between household income and the kind of expenditures that sustain a “middle class” life (house, car) or working class life (rent, car, food, gas, utilities, healthcare) will simply be more expensive over the long run. So the 90% will be asked to tighten their belts, work harder, give up any dream of being debt-free or owning property, forget buying a house and probably forget having kids. This is in fact what we’ve already seen.

So there’s no chance the Fed raising rates will change inequality. There’s little chance it even brings down general inflation, come to think of it, since the money they created didn’t go to people, it went to companies — so that they could use it to boost the wealth of the elites who own 80% of their stocks. So it may lower equity markets. It will probably lower housing markets too.

Otherwise there’s little that the Fed can do about wages, about price gouging, about stock buybacks, about supply chain disruptions, commodity shortages, climate change or wars. Inflation is global right now, for global reasons.

High interest rates aren't the worst thing in the world. Think about the effects on housing. When interest rates on mortgages fall, home prices get bid up because people can afford larger mortgages. What we saw early in the pandemic was historic, rock bottom interest rates helping to spike home prices. — Count Timothy von Icarus

It wasn’t just low interest rates. It was also low inventory. Ask any realtor. New construction hasn’t kept up for years, and people who did own a home were reluctant to sell during the pandemic.

Otherwise there’s little that the Fed can do about wages, about price gouging, about stock buybacks, about supply chain disruptions, commodity shortages, climate change or wars. Inflation is global right now, for global reasons. — Xtrix

The Fed can only manage the short term effects of all this stuff. Right now it is sending a signal to employers that it will stop any potential wage spiral. It will engineer a recession if that is what's needed to lower worker's expectations.

The discourse around Powell's confirmation was grim. I'm still new to a lot of this stuff, but it was eye opening to see how many people think the Fed is the only arm of the government that can function properly. It's only good for saving banks during a crisis and crushing labor when it begins to organize.

Basically the Fed plays an important role in allowing capitalism to survive. It can't do much to make capital operate in a fair or productive way, but it stops the system from collapsing.

For sure, I didn't mean to imply it was one thing. I just wanted to point out the relationship between mortgage rates and home prices. Lower rates push prices higher. Arguably the single biggest factor aside from population growth pushing home prices up for the past 20 years is computers and the automation of tons of legal work that used to be done by hand. Houses as an asset have become incredibly more liquid, which has caused investors to poor into the asset class. The time it takes to sell a house becoming so much shorter makes its liquidity premium go up significantly.

My main point was simply that low rates are generally seen as good for working class people. This isn't necessarily true. All else equal, if you expect rates to fall in the future, you may be better off with a high rate and lower principal on your mortgage.


The Fed has historically been staffed by appointed specialists. It also has a great deal of political independence and insulation from public opinion. I think this explains the better performance.

Unfortunately, monetary policy can only move the needle on things so much. Fiscal policy needs to be a major mover in any solution.

US elections systems are almost tailor made to result in legislators who are significantly more radical than the median voter. Add in the blisteringly short two year election cycle, first past the post, winner take all voting that stifles third party competition, and the undemocratic structure of Congress, and it is a recipe for deadlock and political chaos. Demagogues have a significant advantage in the closed, first past the post primary system for selecting party candidates and the skillet for winning elections is not the same as the skillet for governing.

Ironically, the system wasn't set up this way. The Electoral College and the power of state legislatures to pick senators was designed as a check on "the will of the mob." Now those capabilities help the mob keep the GOP alive as a viable rival to the Democrats, even though they have won more votes in just one national election in almost a third of a century (and that one they won with the benefit of an incumbency from an election where they received less votes, and still won by a very narrow margin).

But I think the problems with these very old institutions have given us the wrong idea. The solution is seen as more direct democracy. I don't think this is the best idea.

Every study I've seen shows that appointed professional city and county managers tend to perform better on virtually every metric than elected mayors and commissioners. To be sure, there have been corrupt city managers, but they're much less likely to have corruption issues than mayors. Cities with city administrators and CAFOs, essentially city managers appointed by the mayor instead of the local council, also drastically improve outcomes. We also see how much better the Fed preforms than Congress.

To my mind, it certainly makes sense that this would work just as well on larger scales. There are other changes we need, instant run off or even closed list voting, open primaries, easier access to voting, the Wyoming rule to make House representation based on equal population again, representatives for DC, etc. However, a big change for the good would be replacing first past the post popular elections for governors and the presidency with appointed professionals. You still have elections, just like the city manager system, but the elections are for a small executive council to pick the governor or president. And I do mean "small," over 13 people or so you tend to start getting factionalism and less quality debate.

The executive council gets to pick the executive and then also act as advocates of their constituency to the executive. The executive is picked based on professional credentials for a specified term. They can also be removed by the council, normally with a slightly larger share of the vote (e.g., seven votes needed to appoint a leader, 9 needed to remove them). Rather than term limits, one way to deal with incumbency inertia is to raise the number of votes needed to reappoint a popular leader over time. So you might need just 7 votes for the first two terms, but then 9 for term three, and 11 for term four, and unanimous consent to continue on after that. This avoids the problem of term limits cutting out high quality leaders.


Side note:

I think the downsides of term limits really showed with the election of Donald Trump on extremely narrow margins verses an historically unpopular Democratic candidate. There is little doubt Barack Obama would have steamrolled Trump on a way to a third term and he is a leader who I think improved over time. Nor are three term candidates likely. We had one person make it past two terms in all the years it was legal to go over two terms. Since then, only Reagan and Obama had solid shots at winning a third term. Reagan likely would not have run again anyhow due to dementia issues, but even if he did, he'd be resigning and giving power to Bush, the guy who succeeded him anyhow. Obama had his faults, but was a very steady leader during a tumultuous time, and while alternative history gets murky the further you go out, I can see us in a much better place right now if we was settling into his fourth term.

I just wanted to point out the relationship between mortgage rates and home prices. Lower rates push prices higher. — Count Timothy von Icarus

I know you’re not implying one thing, but emphasis is important. So yes, I’d be a fool not to notice interest rates has a very real effect on the housing market. But what I’m ultimately fighting against is the idea that inflation is a matter of too much money in the economy. It’s just used as a cover to criticize increases in wages and working people getting a little money— god forbid.

My main point was simply that low rates are generally seen as good for working class people. This isn't necessarily true. — Count Timothy von Icarus

Low or high rates really don’t matter much for working people. They’re screwed one or another. The majority of benefits goes to the wealthy. That’s my point.

Given sufficient inflation, the cost of everything goes up. Including the costs of businesses that collapse and life-savings that are lost.

Yes, even income goes up. Unfortunately, it doesn't keep pace with the costs of everything else......

I suspect we will have this conversation from two very different perspectives, but here are some initial reactions to the general area of equity value increasing.

Markets are not necessarily tied at the hip - what is true in the US is not true in Japan and trying to make broad historic comparisons devoid of any nuance is fraught. If one is to consider the long-term trend of large cap stocks, it feels like the trend should be limited to an appropriate context/scope rather than universalized.

Large cap stocks (or publicly traded equities more generally) in the US are in a weird position precisely because of some of the things you hinted at but did not necessarily explore - the need for the average schmago who hopes to stop working at some point to somehow provide for their own "income" in later life. The US has perversely incentivized savings vehicles which favor equities. What this ends up meaning is that there is a constant influx of new money into a market that is already fully owned, i.e. for new money to make an "investment" it has to get the old securities from someone willing to sell. The entire large cap market simply goes up in value sufficient to absorb the new money being poured into it. This is the case irrespective of the performance of the underlying securities absent there being an alternative investment to absorb the new money (see the recent stupidity regarding things like crypto and efts).

Because people are placing huge sums of money in the public equities market, it has become a store of value that is unrelated to the "fundamentals". For instance, if you are discussing "income" as in the stock paying capacity of a publicly traded entity, you are missing the current justification for modern investments: total return. One does not invest money in hopes of "income", rather people are investing in hopes of capital appreciation that is realizable upon sale of the security (rather than liquidation of the entity). Until such time people are convinced that the large cap equities are not a store of value with a realistic potential for outsized total returns, there is no danger of the overall investment class declining - there will just be a shifting of value from one equity (share of stock) to another.

Debt capital is not independent of equity capital. Where businesses can attract necessary financing through new equity at tolerable rates of return, the features of equity may exceed the allure of the benefits of debt. The current interest rates are as much market driven as controlled by a particular inter-bank interest rate and lenders have been tripping over themselves to basically give away (loan) money for free. Lending appears to be more like an inflation hedge rather than a place to make profits (and this might be heavily influenced by packaging of debt instruments to be sold as secondary instruments). Yes, there are large interest rates to be had in areas like consumer debt (credit cards), but the rates of default and what not may not make those avenues of lending as lucrative as the face value of interest suggests.

Ultimately, I think much of this relies on the idea that "you can't beat the market." People are required to invest but lack the skills/time/resources to make informed choices (choices that exploit differing values/investment goals rather than asymmetry of knowledge). Money keeps pouring in because it must and early investors are keen to take advantage of their privileged status to make giant gains on IPOS or other secondary offerings (to institutional investors or consumers). Perhaps it is most easily summed up with the idea that those who can afford to lose are poised to win and those who can't afford to lose are stuck in a rat race of funding the winners while hoping that they can get out before the market moves on. As long as everyone keeps faith, the scheme continues - if people lose faith, it all falls apart.

In any event, the value of the dollar (or any currency) is a function of the market in which it is exchanged. Actually productivity is independent of the way in which it is valued and what we see is that our markets (driven principally by large cap behavior) continue to increase their productivity and there is little reason to believe that the rate of increase of productivity will slow down, i.e. large cap stocks should see real growth.