Current Events > 'The world does not have a debt problem: it has a wealth inequality problem...

(+) Yeah! (+)

...that must be tackled now' - Tax Research UK

http://www.taxresearch.org.uk/Blog/2017/07/17/the-world-does-not-have-a-debt-problem-it-has-a-wealth-inequality-problem-that-must-be-tackled-now/

An excerpt from the article:

But it’s the cash that really interests me. These are savings. As I have explained, and as the Bank of England agrees, the economy does not need savings. They are not what funds investment. When a bank makes a loan it does not lend on depositors’ money. What it does instead is create new money. And what savings are is the unspent part of that new money that was created out of the loan.

Think of this another way. The borrower has spent the money they secured from a bank and they have to service the debt. But some of the people they paid are not spending what they received; they’re saving it. But that does not create new loans or investment, because we know that’s not true and we know savings have no role in that process. So what do these savings represent? Quite simply they are money withdrawn from use in the economy.

This is serious, especially if it’s going to exceed US$10 trillion a year. What it means is that the borrowers (and I worry most about small business and individuals here) are trying to service debt but the rate of growth in the economy that should permit them to do so is being severely limited because vast sums that they’re spending are being withdrawn from the economy each year as savings, which slows the entire economy down by preventing the flow of money within it. The result is simple: we remain in the economic doldrums at best; income growth remains poor, whilst the stock of world savings grows outrageously and governments, as the borrowers of last resort for the savings of the world’s wealthy, have to continue to run deficits which they say curtails their opportunity to take action to redress any of the economic issues arising (whether that is true or not, which for the record it is not). And in the meantime those in debt have to borrow more to service debt that already exists. The spiral is very dangerous.

And the conclusion:

What is to be done about it? The answer is that if the world is facing such an enormous glut of savings then they have to be taxed as fast as possible to prevent they imbalances they create. So we need higher corporation taxes. We need withholding taxes on dividends and interest going to tax havens. We need capital gains taxes at rates as high as income taxes. We need an investment income surcharge to increase tax rates on unearned income to match those including national insurance on earnings. And we need effective wealth taxes. Plus a continued crack down on tax havens, of course.

And I mean we may need all of these. The world cannot afford for its wealthy people to become US$57 trillion richer in the next five years. That would be a disaster for us all, including the wealthiest. So action is needed urgently. And now. We can’t wait for things to get ugly.

Thoughts?

I know most Americans (and most people?) will probably recoil in horror at the conclusion there.

As a layman (meaning I'll probably be way off base here), I can sympathize with it. It seems intuitive to me that if wealth holdings are increasing so quickly, and therefore more and more money is being removed from circulation in the economy, that income growth and investment stall, debt goes up, etc. Taxation is much maligned, but it does have an important role in the economy beyond just "stealing from the rich" (and funding public services obviously). The article claims that if the situation doesn't change, things will "get ugly".

Perhaps people better versed in economic matters can comment, e.g. @Darkman124.

Not much if a difference tbh

Debt is literally the process of one person with little money giving extra money to another person with a lot of money, usually because of impatience and/or imprudence.

There are some good loans to have, but a car ain't one of em.
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When a bank makes a loan it does not lend on depositors’ money. What it does instead is create new money.

From what I understand of macroeconomics, this is blatantly false, but I may be misunderstanding what the author is trying to say.

Also I'll give my thoughts on the article in general later when i have a bit more time.
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"I don't have a gambling problem. I have a money problem!"
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https://www.youtube.com/watch?v=aGooHl2R_Y8
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solution: buy more money
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DevsBro posted...

There are some good loans to have, but a car ain't one of em.

Why not? I agree that one shouldn't buy a car that's massively above their means, but car loans have some of the lowest interest rates. You'd probably be better off making your monthly payments and investing the money you have left over instead of paying cash in one lump sum.
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Why not? I agree that one shouldn't buy a car that's massively above their means, but car loans have some of the lowest interest rates. You'd probably be better off making your monthly payments and investing the money you have left over instead of paying cash in one lump sum.

Very well could be. If you have good investment opportunities, and actually use them, you might be better off this way.

But most people don't.
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I think the fundamental point is that deficit spending with the expectation that inflation + economic growth over time makes said spending a good investment in the country is being undermined when wealth concentration in the hands of the few results in economic growth not occurring within national borders and inflation not happening at all.

The principal argument is that we shouldn't be trying to "adjust" to the power the wealthy now have, but rather we should be stripping it from them.

It's a bit dark, but it's not entirely wrong--if we "adjust" we'll find ourselves forced to keep doing so as the rich get richer and the threat to just take their money and run gets more and more viable.

One of the basic requirements for government to operate effectively is that its tax base has to pay. When the bulk of the tax base can simply go somewhere else and not pay, government falls apart.
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tldr

The three major causes of poverty are debt, having no income, or poor budgeting skills. Usually it's a combination of two or all three.

an example of an easy to support hit to the wealthy would be removing the carried interest treatment as capital gains

http://www.taxpolicycenter.org/briefing-book/what-carried-interest-and-how-should-it-be-taxed

another would be disallowing large corporations to carry losses over from year to year as deductions from subsequent years' profits
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DevsBro posted...

Why not? I agree that one shouldn't buy a car that's massively above their means, but car loans have some of the lowest interest rates. You'd probably be better off making your monthly payments and investing the money you have left over instead of paying cash in one lump sum.

Very well could be. If you have good investment opportunities, and actually use them, you might be better off this way.

But most people don't.

Fair enough. It is hard to get the average person to stick to investing.
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This is exactly why we just need to remove the 1%ers from society.
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So his problem is with hoarding cash savings

And his solutions are all about taxing investments and corporations?

Uhh
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TheBiggerWiggle posted...

This is exactly why we just need to remove the 1%ers from society.

Nope.

1 percenters can and usually are your local surgeons and shit. Guys that are single digit millionaires....
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Fine, the .1%ers
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TheBiggerWiggle posted...

Fine, the .1%ers

But then you would get rid of Elon Musk and Bill Gates an....

Actually please get of Gates.
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But then you would just have a new .1%
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And then we get rid of them too. We keep eliminating them until they aren't selfish.
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Darkman124 posted...

It's a bit dark, but it's not entirely wrong--if we "adjust" we'll find ourselves forced to keep doing so as the rich get richer and the threat to just take their money and run gets more and more viable.

The quickest way to get to Mars is to threaten a wealth-grab.
Not because we suddenly have a surplus of funds for research and engineering, but because the wealthy have left the planet entirely.

luigi13579 posted...

What is to be done about it? The answer is that if the world is facing such an enormous glut of savings then they have to be taxed as fast as possible

Wow, remind me to hope this guy never gets into power. I'm tired of this European "war on savings" attitude. Also these savings are not even the hoards of wealth, as those actually are being invested, but instead actual savings in cash in commercial banks. If that's what this guy thinks is the problem, then he's complaining about everyone but the wealthy and the ultra poor.
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Questionmarktarius posted...

Darkman124 posted...

It's a bit dark, but it's not entirely wrong--if we "adjust" we'll find ourselves forced to keep doing so as the rich get richer and the threat to just take their money and run gets more and more viable.

The quickest way to get to Mars is to threaten a wealth-grab.
Not because we suddenly have a surplus of funds for research and engineering, but because the wealthy have left the planet entirely.

What does going to Mars have to do with a wealth grab though? How are they going to take that wealth with them? Gold bars aren't going to be much use on Mars. Without the ability to buy goods/services on Earth, what does wealth even mean?
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Sativa_Rose posted...

luigi13579 posted...

What is to be done about it? The answer is that if the world is facing such an enormous glut of savings then they have to be taxed as fast as possible

Wow, remind me to hope this guy never gets into power. I'm tired of this European "war on savings" attitude. Also these savings are not even the hoards of wealth, as those actually are being invested, but instead actual savings in cash in commercial banks. If that's what this guy thinks is the problem, then he's complaining about everyone but the wealthy and the ultra poor.

There's been rumblings of negative interest rates in Europe for awhile now, but all that actually does is empty the banks, when people realize that cash decaying from inflation is slightly preferable to it being overtly confiscated.

Questionmarktarius posted...

Sativa_Rose posted...

luigi13579 posted...

What is to be done about it? The answer is that if the world is facing such an enormous glut of savings then they have to be taxed as fast as possible

Wow, remind me to hope this guy never gets into power. I'm tired of this European "war on savings" attitude. Also these savings are not even the hoards of wealth, as those actually are being invested, but instead actual savings in cash in commercial banks. If that's what this guy thinks is the problem, then he's complaining about everyone but the wealthy and the ultra poor.

There's been rumblings of negative interest rates in Europe for awhile now, but all that actually does is empty the banks.

Emptying the banks is what this guy seems to want if he thinks over-saving is the problem. I don't think that at all for the record. I think that poor governance is ultimately "the problem" if we're going to simplify it like that. And yes, the effect of big money in politics, or legalized bribery as we sometimes call it in the US, has contributed to poor governance. So we need to fix the money in politics issue.
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Sativa_Rose posted...

Emptying the banks is what this guy seems to want if he thinks over-saving is the problem.

Which will accomplish nothing, when all that money merely moves from a bank to a mattress.

Sativa_Rose posted...

And yes, the effect of big money in politics, or legalized bribery as we sometimes call it in the US, has contributed to poor governance. So we need to fix the money in politics issue.

Strongly, strongly agreed.
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And then we get rid of them too. We keep eliminating them until they aren't selfish.

So we keep killing people until the global population is under 500. Because at that point, .1% of people rounds to zero people.
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It wouldn't get that far. People would eventually stop being ass holes.
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TheBiggerWiggle posted...

It wouldn't get that far. People would eventually stop being ass holes.

That's not true. You won't.

Have I upset you for some reason?
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Darkman124 posted...

another would be disallowing large corporations to carry losses over from year to year as deductions from subsequent years' profits

How in any way is this easy to support?
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Drpooplol posted...

Darkman124 posted...

another would be disallowing large corporations to carry losses over from year to year as deductions from subsequent years' profits

How in any way is this easy to support?

iirc it was something trump campaigned on and GOP voters tolerated it

if it sells to republicans it would def sell to dems
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That's one of the most surprising political things I've heard in a long time.

Huh.
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Drpooplol posted...

That's one of the most surprising political things I've heard in a long time.

Huh.

one of the positives of trump's campaign was it revealed how much the GOP base are social conservatives who were barely listening when economics were discussed, I think.
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Drpooplol posted...

When a bank makes a loan it does not lend on depositors’ money. What it does instead is create new money.

From what I understand of macroeconomics, this is blatantly false, but I may be misunderstanding what the author is trying to say.

Also I'll give my thoughts on the article in general later when i have a bit more time.

I'm pretty sure it's interest rates that essentially cause the creation of new money.
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That is one of the most insane and incorrect things I've ever read in my 26 years on this earth.

IfGodCouldDie posted...

Drpooplol posted...

When a bank makes a loan it does not lend on depositors’ money. What it does instead is create new money.

From what I understand of macroeconomics, this is blatantly false, but I may be misunderstanding what the author is trying to say.

Also I'll give my thoughts on the article in general later when i have a bit more time.

I'm pretty sure it's interest rates that essentially cause the creation of new money.

drpooplol is correct, it doesnt work that way

banks will lend money they have, then immediately package the loan into a security which is sold on the bond market. typically there is some form of origination fee, either in the form of a higher interest rate (enabling sale of the loan at a price higher than the amount loaned out) or a flat sum the borrower pays to the bank for a lower rate.

bond investors are what allow bank loans.

(which is fine so long as the bank can't also speculate on their own loan packages)
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At least in the US under Dodd-Frank, banks are required to hold an amount in reserves based off of the amount they have in deposits (and other assets they own). They have a maximum leverage ratio that they are allowed to have. The more they have in reserves (like deposits in a savings account), the more they can lend. So at least in the US, I don't see how it could be true to say that the amount of lending is not related to savings. I don't know what he's talking about with the Bank of England, though.

That's why I made a comment earlier about how the Europeans seem to be having a "war on savings". They are doing some crazy stuff over there with negative interest rates and whatnot. Not sure about the UK though.
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Sativa_Rose posted...

At least in the US under Dodd-Frank, banks are required to hold an amount in reserves based off of the amount they have in deposits (and other assets they own). They have a maximum leverage ratio that they are allowed to have. The more they have in reserves (like deposits in a savings account), the more they can lend. So at least in the US, I don't see how it could be true to say that the amount of lending is not related to savings. I don't know what he's talking about with the Bank of England, though.

That's why I made a comment earlier about how the Europeans seem to be having a "war on savings". They are doing some crazy stuff over there with negative interest rates and whatnot.

this is a relatively lax requirement, since the banks don't technically 'hold' most of their loans for more than a day or two and generally sell them straight to FNMA/FMAC and then just buy the right to service the loan
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Also, there's a deep inherent contradiction in his logic. If banks don't need reserves in order to loan money for investment, and if saving isn't actually needed for investment and growth...why does it matter that people are not spending every dime? Banks could, on his view, still loan money for investment and consumption.

This guy is literally insane. I hope no one in the UK buys into his nonsense, otherwise the UK will literally collapse once all the successful people leave. Being against savings to this degree (even after claiming that savings are not needed for the creation of new wealth and new money) is a recipe for disaster.

Darkman124 posted...

bond investors are what allow bank loans.

I wouldn't say this is fully true, it just makes the market more efficient and allows banks to attain specific risk targets more easily. Banks were still making loans before the bond market existed on a large scale.
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Drpooplol posted...

I wouldn't say this is fully true, it just makes the market more efficient and allows banks to attain specific risk targets more easily. Banks were still making loans before the bond market existed on a large scale.

they were. but today only ~40% of mortgage loans are not run through FNMA/FMCC/ginnie and i expect the bulk of those are jumbo, subprime, or ARMs--which might still be bought by bond buyers, at a different premium.

the same is likely true of other loan types.
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Right, I was just being a big nerd.
Darkman124 posted...

i expect the bulk of those are jumbo, subprime, or ARMs

I wonder what those numbers were like before 2008 lmao.
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Drpooplol posted...

I wonder what those numbers were like before 2008 lmao.

god i dont want to think about that. but in that era even those were being bought up as AAA assets. it makes me want to throw up.
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Darkman124 posted...

Drpooplol posted...

I wonder what those numbers were like before 2008 lmao.

god i dont want to think about that. but in that era even those were being bought up as AAA assets. it makes me want to throw up.

And to think there are people who want to repeal the regulations preventing that now.
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