Piezoe: You're right. My saying that Piketty is just using French data is an oversimplification. In fact the evidence is that Piketty BEGAN with a French bias developed from his French work and then deliberately falsified data he passed off as international in order to confirm his pre-conclusion. This, of course, paints Piketty a lot more darkly. http://fee.org/freeman/picking-piketty-apart/ But you know what... I DON'T CARE. You're also right in that I have not read Picketty. I don't want to. I can't. I won't. I am wasting enough time reading other people's reviews of Picketty. Nobody cares about the nuances discussed in this thread. The original thread had to do with corporate taxation, offshoring etc and held some mild interest. The detailed 'discussions' of these derivative issues are booring, beside the point and NOBODY CARES. BTW: Using a word like 'imbecile' is childish and hardly a professional or intelligent contribution in any thread. Don't do it
So he used five different sources of data that he switched between at carefully selected times to construct his most important chart of inequality. And we're all supposed to accept it or Krugman will call us deniers. smh Why does this remind me so much of global warming. When they want your money and control over your life, a little data manipulation is tops on the list of tactics.
Ad hominem means you talk about the person not the substance of the idea. I am guilty of this too, but I think it destroys threads and is not satisfying, using pejoratives, like 'imbecile' to describe a poster is probably best avoided no matter how tempting. Fhl you are right on the nose about investment but the issue is driven by fiscal policy, not monetary policy that assumes CB control. Raising interest rates does not create investment any more than lower interest rate creates investment. Investment is driven by a risk discounted assessment that an after tax profit will be realized and possessed that is commensurate with the risk. Cost of money is not the most important issue; its fiscal context that sets the risk assessment.
Your point is well taken, Breen. And let me add that I am in full concurrence with your remarks re incentives behind investment. When I read those remarks re Piketty's work written by someone who admits he's never read it but only the reviews --frankly I doubt he's done that either-- it was, to me the equivalent of reading, "Adam Smith, Marx, Keynes, von Mises, Popper, and Hayek don't matter." Of course they matter, and Piketty's work matters as well. It is the compilation and analysis from a decade of careful research by many hands. It will have large influence in early 21st Century economics and sociology. It is already assigned reading in graduate economics programs . To dismiss it thus: " Pinketty is French and his research was based on French data", is more than I am willing to let slide. I am visiting an economist friend in New Orleans this weekend and I wanted to take Matthew Regnile's paper with we, but my printer is broken. Perhaps I can access it their. I want to get another opinion.
Central banks don't create investment by raising rate, that is correct. But they do inhibit them by lowering rates below the natural rate. They push all rates down, including those on risk assets, which was their stated goal. When rates on risk investments creep down to low levels, there is less incentive to invest in them. If I can't get more than a puny return by investing in a risk asset, I will use the money to speculate in the mkt or consume, not to invest in a capital asset for productive purposes. If rates are near zero, there is no reason to invest. Just consume it now. If rates are high, you have an incentive to invest the money and have much more money available at the completion of the investment with which to consume with later. The process for determining whether to invest is as you said, but it is not divorced in the aggregate from interest rates on risky investments. There will be less that meet the criteria that you outlined when rates on risky investments are low. Companies like IBM are doing just what they have an incentive to do. Eat their capital base rather than invest in more. Because returns on risky investments don't cut the mustard.
We have been criticized from moving far away from corporate tax here, but this thread was dormant for years before I revived it this past week, and your comments are interesting to me, so its OK with me if we follow where intelligent interaction leads. You admit that raising rates doesn't create investment. I think that is obvious. This is why I don't think the argument that if the Fed raised rates that move alone would create investment. There are a lot of people who get air time in the financial press who say that, but I am glad you agree that it is non-sense. Then you say the Fed inhibits investment by lowering rates. Lets start with the idea that low rates are entirely the doing of the Fed. I don't think that is true. If you look at a graph of rates (say 10 yr Treas. rates) since 2009 when Fed became hyperactive, you will see that rates first dropped as equities collapsed before Fed action...then every time the Fed announced a QE program (ostensible to reduce rates) rates went up from the base before they announced, and every time they announced they would end a QE program rates went down from the base before they announced. In this fashion we have ratcheted rates down through QE 1, 2, and 3 and during side show twists and rhetoric. If the Fed attempts to increase short rates in December, I suggest that after a trading interlude, mid and long term rates will go down, not up. This has been the pattern of fact for six years even though the idea and the economic and media discussion parrots the opposite...just look at the data. I suggest rates are low because demand for investment is low, and demand for investment is low because of fiscal context bleeding into demographic realities. I don't believe it is possible for the Fed to actually raise rates in a sustained way. They can talk about it but they can't do it. The conventional mechanism (before they screwed up the bond and money markets) for Fed interest raising was for the Fed to increase the rate of Fed Funds, overnight loans that used to be used to clear all payments and deposits in the aggregate banking system over night. Banks with deficits automatically received a FF loan and banks with surpluses automatically swept those surpluses into the FF deposit; in the aggregate it all balanced and the Fed maintained the rate by selling and buying securities through its open window account to maintain that rate. Today, however, almost all banks have excess reserves due to the Feds QE actions. Now, the process of overnight clearing involves adding to or subtracting from each individual bank's excess reserve account with no need to borrow FF in order to clear in the aggregate. So, when the Fed says it may raise the rate on FF by .25% they are talking about raising the rate on funds that no body borrows, FF is no longer attached to the credit yield curve. To actually raise interest rates the Fed will have to manipulate the rate it pays on excess reserves, a relatively new process that it just created, not at all conventional. The problem with manipulating that rate is that banks don't want these funds in the first place, they are excess reserves because the banks don't have a better option for risk rated capital adjusted investment....because of a lack of demand for loans that can be properly underwritten and a scarcity of top rated government paper because the CBs and money center banks have bought it all and are not selling it. So, in order to get something to happen the Fed just can't just reduce the rate on excess reserves, to do that would simply shift income from the banks to the Fed and increase demand for top rated governments which would cause rates to drop. So, the Fed has to start lending its portfolio of top rated government securities through reverse repo agreements and allow money market funds to participate in this process. It has to then manipulate the rates of the repos and the rate on excess reserves and the symbolic FF rate to maintain a spread for the repos....this will nationalize the repo and money markets as private transactions will no longer make sense because of capital requirements. This is a mess. If they can walk this gauntlet and actually manage to get rates to start increasing up the curve it will crash the equities market and capital flowing out of equities will push yields back down. Best the Fed can really do is talk about it; they really don't have the tools to do it....this is why Draghi is all talk, to follow though he will end up buying equities like Abe is.
We have been criticized from moving far away from corporate tax here, but this thread was dormant for years before I revived it this past week, and your comments are interesting to me, so its OK with me if we follow where intelligent interaction leads. You admit that raising rates doesn't create investment. I think that is obvious. This is why I don't think the argument that if the Fed raised rates that move alone would create investment. There are a lot of people who get air time in the financial press who say that, but I am glad you agree that it is non-sense. Then you say the Fed inhibits investment by lowering rates. Lets start with the idea that low rates are entirely the doing of the Fed. I don't think that is true. If you look at a graph of rates (say 10 yr Treas. rates) since 2009 when Fed became hyperactive, you will see that rates first dropped as equities collapsed before Fed action...then every time the Fed announced a QE program (ostensible to reduce rates) rates went up from the base before they announced, and every time they announced they would end a QE program rates went down from the base before they announced. In this fashion we have ratcheted rates down through QE 1, 2, and 3 and during side show twists and rhetoric. If the Fed attempts to increase short rates in December, I suggest that after a trading interlude, mid and long term rates will go down, not up. This has been the pattern of fact for six years even though the idea and the economic and media discussion parrots the opposite...just look at the data. I suggest rates are low because demand for investment is low, and demand for investment is low because of fiscal context bleeding into demographic realities. I don't believe it is possible for the Fed to actually raise rates in a sustained way. They can talk about it but they can't do it. The conventional mechanism (before they screwed up the bond and money markets) for Fed interest raising was for the Fed to increase the rate of Fed Funds, overnight loans that used to be used to clear all payments and deposits in the aggregate banking system over night. Banks with deficits automatically received a FF loan and banks with surpluses automatically swept those surpluses into the FF deposit; in the aggregate it all balanced and the Fed maintained the rate by selling and buying securities through its open window account to maintain that rate. Today, however, almost all banks have excess reserves due to the Feds QE actions. Now, the process of overnight clearing involves adding to or subtracting from each individual bank's excess reserve account with no need to borrow FF in order to clear in the aggregate. So, when the Fed says it may raise the rate on FF by .25% they are talking about raising the rate on funds that no body borrows, FF is no longer attached to the credit yield curve. To actually raise interest rates the Fed will have to manipulate the rate it pays on excess reserves, a relatively new process that it just created, not at all conventional. The problem with manipulating that rate is that banks don't want these funds in the first place, they are excess reserves because the banks don't have a better option for risk rated capital adjusted investment....because of a lack of demand for loans that can be properly underwritten and a scarcity of top rated government paper because the CBs and money center banks have bought it all and are not selling it. So, in order to get something to happen the Fed just can't just reduce the rate on excess reserves, to do that would simply shift income from the banks to the Fed and increase demand for top rated governments which would cause rates to drop. So, the Fed has to start lending its portfolio of top rated government securities through reverse repo agreements and allow money market funds to participate in this process. It has to then manipulate the rates of the repos and the rate on excess reserves and the symbolic FF rate to maintain a spread for the repos....this will nationalize the repo and money markets as private transactions will no longer make sense because of capital requirements. This is a mess. If they can walk this gauntlet and actually manage to get rates to start increasing up the curve it will crash the equities market and capital flowing
Breen, I think you might revisit this interesting analysis: "To actually raise interest rates the Fed will have to manipulate the rate it pays on excess reserves, a relatively new process that it just created, not at all conventional. The problem with manipulating that rate is that banks don't want these funds in the first place, they are excess reserves because the banks don't have a better option for risk rated capital adjusted investment....because of a lack of demand for loans that can be properly underwritten and a scarcity of top rated government paper because the CBs and money center banks have bought it all and are not selling it." As a test of your analysis, we can observe how effective a rise in the FF rate is in producing a rise in short term loan rates at banks. If the banks' spread contracts then I would say you're right on the money, otherwise I think not. It is easy to forget, after interminable rounds of massive QE, that not only can the Fed buy bonds, they can also sell them -- perhaps, as you say, they are not, but they can. If, as you say, there is a 'scarcity of top rated government paper', the Fed could sell bonds. The Fed is by no means out of bullets. So far, I think their handling of the crisis, one they had a hand in creating, has been masterful. We'll see what happens going forward. I wouldn't put much money on them 'crashing' the equities market. (Of course it will have short term spasms, as always.) They will not make any precipitous moves, and they will continue to be data driven.. They are not going to pay any attention to Wall Street, hedge fund yahoos, whose ignorance of Central Bank operations is often shocking. This does not keep them from attempting to tell the Fed how to run their business, and the result is comedy.
I spent time with Matthew Rognlie's Brookings Institution paper this past weekend. It is a potential black hole which I am not inclined to fall into. I did not find anything however that would in the least negate, or even conflict very much with, the broad conclusions and assertions in Piketty's ' Capital in the 21st Century'. My review of Rognlie's paper, which I admit I only spent a couple hours with, led me to conclude it's another one of those common 'gotcha' attempts one finds in economics. Piketty's work is too thorough and sweeping to easily lend itself to gotcha tactics. It is going to take a work of equal magnitude to derail it, if it can be.. Rognlie did not recognize that Piketty's study, in the main, actually agrees with Rognlie's. The return on capital will decline going forward, but that will not reverse the trend to accumulation. Rognlie's conclusion re the housing component of capital is incorrect, but even if they weren't, Piketty's main thesis would remain intact. I don't buy Rognile's arguments based on net of depreciation.
You say "Rognilie's conclusion re the housing component of capital is incorrect." Specifically, what exactly is incorrect about the housing component and Rognilies's conclusion?