Oligarchy and Monetary Policy: I Confess That I Do Not Understand: Monday Focus: April 7, 2014

Why do the top 0.01% think they want a depressed real economy and low inflation?

Back before World War I there were many very rich people with nominal assets: nominal bonds and real estate rented out for very long term at fixed nominal rents. As a result, they had to clear an immediate financial interest in hard money: low inflation. But after World War I, everybody realizes the risk of holding a heavily nominal-weighted portfolio in a fiat-money world subject to bouts of large inflation. Since 1920 the super-rich are almost as likely to be net nominal borrowers as net nominal debtors. And for anyone with a portfolio predominantly in real assets, the benefits of a high-pressure economy via higher profits and higher growth greatly outweigh any residual negative loading on higher inflation.

Paul Krugman: Oligarchy and Monetary Policy: “I’ve been thinking about how we talk about…

…or don’t talk about–the desirability of low inflation targets…. The latest IMF World Economic Outlook makes a compelling case for raising the target above 2 percent [per year]…. Meanwhile, inflation paranoia is very much a partisan thing…. The signatories of the economists’ letter warning about dollar “debasement” from quantitative easing… [are all] highly committed Republican[s], and some people with the right ideological credentials are on board even though they have no relevant professional credentials. (William Kristol and Dan Senor, monetary experts?)… It is, ultimately, a class thing. Monetary policy isn’t really technocratic and politically neutral; moderate inflation may be good for employment, especially when you’re trying to work off a debt overhang, but it’s bad for the 0.1 percent….

How did the 70s get framed as the ultimate bad time? For sure they weren’t good–but the really bad times for ordinary working families were the big recessions, which took place under Reagan, to some extent under Bush I, and above all after the financial crisis…. But there were some people for whom the 70s really were the worst of times — namely, owners of financial assets…. There is one small but influential group that is in fact hurt by financial repression… the 0.1 percent. Now, I don’t think the 0.1 percent and their defenders are secretly twirling their mustaches, snickering over how they’re using delusions of sound policy to enrich themselves at the expense of the 99 percent. The Kochs don’t even have mustaches. But I do think that the very real conflict between what’s good for oligarchs and what’s good for the economy is, indirectly, having a powerful effect in distorting the debate.

As best as I can figure it out, the 1970s see:

• a steep fall in the value of nominal debts as inflation erodes them.
• a steep rise in housing equity as the value of mortgage debts falls.
• a steep fall in stock market equitiesm even though the value of corporate debt owed falls, as investors become much more pessimistic and value earnings at a much lower multiple–in part because of the productivity growth slowdown, in part because of confusion between nominal and real discount rates, and for other reasons.

The top 0.01% were impoverished by the 1970s as a whole. But they have not been enriched by the post 2008 era. What they have gained via a higher capitalization via low safe interest rates has been offset by what they have lost as a result of depressed profits, depressed by a low level of economic activity, a depression which has not been completely offset by downward pressure on wages. The top 0.01% would not be poorer absolutely (although they would be poorer relatively) in a high-pressure higher-inflation economy.

But they think they would be…