Steve Waldman has a new post up on why rich people, and not so rich people, might prefer hard money over greater wealth. This post was a response to Paul Krugman, and Cullen adds some good thoughts too.
““Full employment” means ungrateful job receivers have the capacity to make demands that could blunt equity returns. And even if that doesn’t happen, even if the rich do get richer in aggregate, there will be winners and losers among them, each wealthy individual will face risks they otherwise need not have faced. Regression to the mean is a bitch. You have managed to put yourself in the 99.9th percentile, once. If you are forced to play again in anything close to a fair contest, the odds are stacked against your repeating the trick. It is always good advice in a casino to walk away with ones winnings rather than double down and play again. “The rich” as a political aggregate is smart enough to understand this.”
Steve says the richest are trading “full employment” for stable prices, because that suits their best interests, and that they believe getting back into the .1% is very difficult, so difficult they do not think they can do it again.
Hard money is the ultimate risk free asset. It is far superior to any real world asset, because it cannot materially degrade. It is a mark in a cloud based accounting ledger, and destroying the ledger doesn’t take away the money.
I’ve pointed out (with prodding from Steve W.) the reason we have such fears of inflation today despite record low actual inflation is almost certainly due to the loss of purchasing power in real money terms after accounting for both inflation AND interest rates. Inflation is actually reducing purchasing power for people holding cash money after accounting for interest rates. Looking at this, we can see why rich people are howling about inflation even when inflation is below 2%. They are losing money for the first time in a generation after taking into account interest.
One thought experiment which may help in understanding why some people fear inflation so much is a simple coin flip wager.
In this wager, it’s a standard “head you win, tails you lose” wager. You have to risk your entire net worth on this wager, but you get to set the odds you get when you win. So, if you lose, you lose everything. If you win, you get some multiple of your entire net worth.
It’s pretty clear higher net worth will result in exponentially higher demands for a winners multiplier. At low levels of net worth, you might take a 2:1 payout, because you know you can get the money back pretty easily. If your net worth is $100, you might take a 2:1 pay out.
But as your net worth gets higher, anyone will almost certainly demand higher and higher multipliers to play. If your net worth is $1m, there is no way you’ll take a 2:1 payout – you’ll hold out for something higher, like a 7:1 payout, or maybe a 10:1.
If your net worth is $100,000,000 – is there some multiplier which is high enough for you to play? How about $1 billion? Is there any multiplier which is worth risking $1bn on a coin flip?