The Great Moderation Just Moderated the Risks of the Rich
Following up on my earlier post, about people swimming in a stream of economic change over which they have no control:
As I often do, I was re-reading some old Steve Randy Waldman posts, and came across one that made the same point quite elegantly: “Stabilizing prices is immoral“. (If you want to understand how economies work, just read everything he’s ever written. Twice.)
One line stood out for me. Wonkish, but remarkably pithy and apt (and accurate):
Symmetrical price targeting turns debtors, taxpayers, and marginal workers into high-beta speculators on the state of the broad economy
He explains (emphasis mine):
Just when these groups need a break, when the economy is bad due to an adverse supply shock, they are hit with additional costs in the name of price stability. Sure, when things are good all over, they get some frosting on their cake. Their highs are higher, but their lows are lower. Symmetrical price targeting turns debtors, taxpayers, and marginal workers into high-beta speculators on the state of the broad economy, while reducing the risk exposure of creditors and secure workers. It represents a vast subsidy, a transfer paid in risk-bearing, from debtors, taxpayers, and marginal workers to creditors and secure workers. A symmetric price target is a better deal than asymmetric price restraint for debtors, taxpayers, and marginal workers — better to have some benefit than no benefit for the burden of guaranteeing other peoples’ purchasing power! But a symmetric price target is still a raw deal.
IOW, “the great moderation” as engineered by the Fed was a thirty-year campaign (still continuing) to protect, preserve, and expand the wealth of creditors and stable job-holders at the expense of those other groups.
Remember: an extra point of inflation transfers hundreds of billions of dollars per year in real buying power from creditors to debtors, from financial-asset holders to real-asset holders (with “real assets” very much including the ability to work).*
And the Fed is run by creditors.
Which reminds me of a post I wrote some time ago:
* Nick Rowe has responded to this statement in the past by saying this is only true of “unexpected” inflation. I would reply by asserting that all changes in the inflation rate are unexpected. Maybe I’ll finish up my post demonstrating that one day.
Cross-posted at Asymptosis.
I agree with you. After all, the creditors took the risk when they lent the money at interest.
But just to be clear, those creditors think of it as “their” money, and inflation as “stealing” it.
It is very nice for debtors to get a free pass, but don’t just assume it is “fair.”
And of course, some of those with “secure” income are living on “fixed” income, so inflation hits them where it really hurts.
After all this time, it’s still “Cross of Gold” in the economic debates. Will be interesting if you’re still singing this song if inflation combines with no wage pricing power for low and moderate income workers.
Which is exactly what we’ve had for at least a decade. Even with low inflation, if wages don’t go up, the people at the bottom get hurt far worse than the people at the top.
That’s why the 70’s with stagflation were better than now for working people: lower unemployment and frequent COLA adjustments.
seems to belong here –
”Real global GDP growth averaged 4.9%a year in the Golden Age years from 1950 through 1973, but dropped to 3.4% annually in the unstable period between 1974 and1979. Dissatisfied with the instability, inflation, low profits and falling financial asset prices of the 1970s, advanced country elites pushed hard for a switch to a more business friendly political-economic system; global Neoliberalism was the result. World GDP growth averaged 3.3% a year in the early Neoliberal period of the 1980s, then slowed dramatically to 2.3% from 1990-99 as Neoliberalism strengthened, making the 1990s by far the slowest growth decade of the post war era.” (James Crotty)
btw, real weekly wages for nonsupervisory personel peaked in 1972.
Growing divergence between the highest paid and the lowest paid is an inevitable consequence of glabalisation and technological advancement. Those with the most skills can utilise technology to leverage their efforts massively (e.g. create a popular app for mobile phones and you could be very rich, very quickly and will totally forget about pay day loans http://northenloans.ca/) those with global reach can now sell into a 7bn person market.