Wealth Distribution

[Ghent12]

Re: Wealth Distribution

Am I the only one that found it ironic that these two graphs were put near to each other?

[Rajiv]

Re: Wealth Distribution

JT,

You are almost there, but not quite in your thinking. Read Margrit Kennedy's work. She nails it.

Why do we need monetary innovation?

A Changing Money System: The Economy of Ecology

Inflation and Interest-Free Money

See also Margrit Kennedy

[jtabeb]

Re: Wealth Distribution

JT -- in your proposed system, would the 'rent' payments on borrowed money drop as you paid back the loan principal? Unlike borrowing a ladder, you can return a portion of the money that you borrow over time.

Absolutely! IF you lent me two ladders, I pay you $20 bucks a week for EACH ladder. If I keep one, but I return the other one, am I still going to pay you $40 bucks a week in rent for ONE ladder, of course not. That would be preposterous (kind of like how our current monetary system is preposterous).

The "rent" is based on how many ladders I borrow from you and how long I keep them. If I return one, why the hell would I keep paying rent on it?

The real world WORKS this way. I think our monetary system should work this way too.

Principle works the same in this system as it does in the compound interest system, if you pay off principle (return a ladder), you don't continue to pay interest (rent) on that retired (returned) portion.

[jtabeb]

Re: Wealth Distribution

Thanks Rajiv. I am always trying to learn. (The problem is the more I know, the more I realize how much MORE I have to learn).

Ignorance really is bliss because you have no idea how much you don't know.

[ThePythonicCow]

Re: Wealth Distribution

1+.2+.2+.2+.2+.2

vs
1.02*1.02*1.02*1.02*1.02*1.02

Do the series, it diverges fast.

While I will agree that (1+x)^N grows faster than 1+x*N, as N increases (for positive x), I do not agree with your implication that my simple interest example is an instance of (1+x)^N. Rather it is rather obvious to me that my simple interest example is an instance of 1+x*N.

Interest compounds if both the principal and accumulating interest are left unpaid. This is as it should be.

If I rent 20 rabbits to you for your children to play with, at a fee of $1 per rabbit per week, and if the rabbits create one more baby rabbit every week, then you can either keep the increasing rabbit colony and increase your rent, or you can return a rabbit a week, keeping your colony at 20 rabbits and keeping your rent at $20.

If these rabbits were some rare and endangered species, I would prefer to get the new ones back, and besides your kids don't need more than 20 to play with. If these are ordinary rabbits and you have as many children as some prolific Arabian King, then you might prefer to grow your rabbit colony.

Either choice should be available to us, such as we might agree.

I actually get that choice on some interest or dividend bearing investments in my brokerage account, to either reinvest the earnings, or to have the earnings deposited as cash in my account when earned.

[jtabeb]

Re: Wealth Distribution

While I will agree that (1+x)^N grows faster than 1+x*N, as N increases (for positive x), I do not agree with your implication that my simple interest example is an instance of

Cow, I did not intend that implication.

All I was trying to show was that 1+x*N will grow at a linear rate and that any exponential function (including simple interest) will grow much faster and rapidly diverge for sufficiently large N.

That's all I meant to say, at least.

[ThePythonicCow]

Re: Wealth Distribution

that any exponential function (including simple interest) will grow much faster

I fear you are still missing my point.

Not all debt interest grows exponentially. Simple interest paid when due, for example, is linear, not exponential.

I borrow $500. I pay back $5 simple interest each month. Sometime later, I pay back the $500 principal, closing out the loan. No compounding.

Money lending can be and sometimes is linear (like the ladder examples), rather than exponentially compounding. It simply depends on whether interest accrues or whether it is paid when due (earned, from the lenders perspective.)

Perhaps this is all quite clear to you, perhaps not. I can't quite tell. But so far it seems to me you are speaking of all debt interest as if it were necessarily exponentially compounding. I beg to differ.

[don]

Re: Wealth Distribution

On inequality and mental illness, Susan Rosenthal has done good work e.g. - her book POWER and Powerlessness

An American Phenomenon

The Psychiatric Drugging of Infants and Toddlers

By EVELYN PRINGLE
The United States has become the psychiatric drugging capital of the world for kids with children being medicated at a younger and younger age. Medicaid records in some states show infants less than a year old on drugs for mental disorders.

The use of powerful antipsychotics with privately insured children, aged 2 through 5 in the US, doubled between 1999 and 2007, according to a study of data on more than one million children with private health insurance in the January, 2010, "Journal of the American Academy of Child & Adolescent Psychiatry."

The number of children in this age group diagnosed with bipolar disorder also doubled over the last decade, Reuters reported.

Of antipsychotic-treated children in the 2007 study sample, the most common diagnoses were pervasive developmental disorder or mental retardation (28.2%), ADHD (23.7%), and disruptive behavior disorder (12.9%).

The study reported that fewer than half of drug treated children received a mental health assessment (40.8%), a psychotherapy visit (41.4%), or a visit with a psychiatrist (42.6%) during the year of antipsychotic use.

"Antipsychotics, which are being widely and irresponsibly prescribed for American children--mostly as chemical restraints--are shown to be causing irreparable harm," warned Vera Hassner Sharav, president of the Alliance for Human Research Protection, in a February 26, 2010 InfoMail.

"These drugs have measurable severe hazardous effects on vital biological systems, including: cardiovascular adverse effects that result in shortening lives; metabolic adverse effects that induce diabetes and the metabolic syndrome," she wrote. "Long-term use of antipsychotics has been shown to result in metabolic syndrome in 40% to 50% of patients."

The lead researcher on the study above, Columbia University psychiatry professor Mark Olfson, told Reuters that about 1.5% of all privately insured children between the ages of 2 and 5, or one in 70, received some type of psychiatric drug in 2007, be it an antipsychotic, a mood stabilizer, a stimulant or an antidepressant.

Psychiatric drugs bathe the brains of growing children with agents that threaten the normal development of the brain, according to Dr Peter Breggin, founder of the International Center for the Study of Psychiatry and Psychology (ICSPP), and author of about 20 books, including "Medication Madness."

The drugs themselves are causing severe disorders in millions of children in the US, he warns. "Substances like antidepressants, stimulants, mood stabilizers, and antipsychotic drugs cause severe, and potentially permanent, biochemical imbalances."

American Phenomenon

A number of presentations at the annual meeting of the American Psychiatric Association in May 2009, addressed the diagnosis of bipolar disorder, including one titled, "Pediatric Bipolar Disorder: A Critical Look at an American Phenomenon," at which Dr Peter Parry, a consultant child & adolescent psychiatrist, and senior lecturer at Flinders University in Australia, presented a survey on, "Australian and New Zealand's Child and Adolescent Psychiatrists' Views on Bipolar Disorder Prevalence and on Rates of Pediatric Bipolar Disorder in the USA."

Dr Parry and his colleagues conducted a survey of child and adolescent psychiatrists in Australia and New Zealand. Of the 199 psychiatrists who responded to the survey, 90.5% thought pediatric bipolar disorder was overdiagnosed in the US.

In an October 1, 2009 article titled, "Medicating Our Children," Dr Parry reports that since "the mid-1990s in the USA, some researchers have claimed that Paediatric Bipolar Disorder (PBD) frequently starts prior to puberty."

One of PBD's main proponents, Harvard University's Professor Joseph Biederman, stating onset "is squarely in the preschooler age group," he notes.

Parry explains that "PBD has been created by moving the diagnostic goalposts away from traditional concepts of bipolar disorder."

"In children," he says, "episodes were redefined to last hours instead of days or weeks and, instead of manic elation, severe anger in children sufficed as mania."

"Unlike diagnoses like ADHD or depression, or simply accepting a child has serious emotional and behavioural problems in reaction to various stressors, PBD implies a lifelong severe mental illness requiring of strong psychiatric medication," Parry warns.


"In the USA," he says, "the public is furthermore exposed to direct pharmaceutical advertising that can feed the natural desire parents of distressed and aggressive children have for a quick solution by suggesting a simple medication fix."

"The medicating of America's children has become intensely controversial, highlighted by the tragic case of Rebecca Riley, a four-year-old Boston girl diagnosed at 28 months old with ADHD and PBD," he points out.

On April 7, 2009, the author of the book, "Shyness: How Normal Behavior Became a Sickness," Christopher Lane, featured an interview on his Psychology Today blog, "Side Effects," with journalist, Philip Dawdy, the creator of the popular website, Furious Seasons, and discussed the rising number of children being diagnosed with bipolar disorder.

"As for bipolar disorder in kids (meaning pre-teens and younger), it's simply not an issue in the rest of the world," Dawdy told Lane. "The bipolar child is a purely American phenomenon."

"The pharma companies and the Harvard crew worked hand-in-hand to bring America a generation of ADHD kids and bipolar children, and their profound influence can be seen in the millions of children and teens who now carry lifetime diagnoses and take gobs of psychotropic drugs each day, often to their detriment," he advised.

Lane asked for Dawdy's opinion on a recent report in the St Petersburg Times that found 23 infants less than one-year-old had been prescribed antipsychotics in Florida in 2007, as well as the drug overdose death of 4-year-old Rebecca Riley in Massachusetts. "How is it possible for psychiatrists to continue prescribing to infants in such numbers without more oversight?" Lane asked.

"What's gone on with antipsychotics prescribed to infants and toddlers is simply inexplicable to me," Dawdy said. "The drugs are known to cause huge problems in adults, so why the heck would a doctor give them to little kids, especially infants? It boggles my small mind."

http://www.counterpunch.org/pringle04202010.html

[jtabeb]

Re: Wealth Distribution

Not all debt interest grows exponentially. Simple interest paid when due, for example, is linear, not exponential.

I borrow $500. I pay back $5 simple interest each month. Sometime later, I pay back the $500 principal, closing out the loan. No compounding.



Perhaps this is all quite clear to you, perhaps not. I can't quite tell. But so far it seems to me you are speaking of all debt interest as if it were necessarily exponentially compounding. I beg to differ.

Oh no, you are quite correct if principle is repaid, but if principle IS not repaid, then it is compounding, is it not?

The most complete form of what I was trying to say was that

"I think a sustainable system is one where compounding is physically impossible as in designed out of the system."

It is my understanding that compounding is still POSSIBLE, even in a simple interest system, if principle is not repaid.

[cjppjc]

Re: Wealth Distribution

I found the houses, called the listing agent and then was then "informed" I needed to be represented by a "buyers agent" for the transaction. (Which they ever so thoughtfully managed to locate for me, in-house, of course).

Many companies will not allow the listing agent to offer Dual Agency. Not surprisingly many seller frown on it too.

[ThePythonicCow]

Re: Wealth Distribution

It is my understanding that compounding is still POSSIBLE, even in a simple interest system, if principle is not repaid.

Compounding occurs when the interest is not paid when due (earned), but rather added to the debt. Thus one earns yet more interest on the not yet paid interest ... that's compounding.

If interest at rate x is paid as earned and the principle P is paid in a lump sum at the end, then after N periods, you pay in total the principle P plus N constant interest payments on the principle while it is outstanding. You repay P + P*x*N == P * (1 + x*N). This is the principle P plus N interest payments at rate x.

If the interest is accrued until the total principle plus interest is repaid in a lump sum at the end, then at the end of each period, the amount owed grows by the interest. A common example would be depositing $100 in a savings account that earned a fixed interest, then letting that savings grow until you withdrew the entire amount (the original $100 plus interest earned) in a lump sum. If you owed $1 at the beginning of a period, and if the interest for the period was 1% of the balance due, then you owe $1.01 at the end of that period. In that example, each period the balance due grows by 1.01 times. In general, if interest at rate x accrues, then after N periods, you owe P * (1 + x)^N on an original debt of P.

The difference between the exponential growth of (1 + x)^N and the linear growth of (1 + x*N) is the difference between compounding (aka accruing or accumulating) growth of interest and not.

The formulas for an amortizing loan, where one is paying some principle plus interest each month, such as in a typical fixed mortgage, are more complicated.

If the principle is not repaid, that's default I suppose. I am unable to guess why you mentioned non-payment of the principle.

[ThePythonicCow]

Re: Wealth Distribution

"I think a sustainable system is one where compounding is physically impossible as in designed out of the system."

Either sort of system is sustainable in my view, given sufficiently competent and responsible participants. Allowing compounding (accumulating interest) complicates things, and raises the ante on the quality of participant required for a sustainable system.

Even simple, no interest debt is too complicated for my cat to understand. It's his, or it is not his. Period.

My dog might loan me some food in rough times, but has no comprehension of interest.

We often teach children the value of earning interest, even compounding interest on savings. However the dangers of owing compounding interest can exceed the mastery of even many adults. Some adults cannot even manage simple debt responsibly. Your neighbor does not always return your ladder.

The dangers of credit default swaps on leveraged derivatives of tranches of securitized sub-prime option-ARM mortgages (or whatever that crap is :rolleyes have apparently exceeded the mastery of human civilizations finest.

[fallout]

Re: Wealth Distribution

A conventional fixed rate mortgage or auto loan, a very typical and conservative "loan" most typical of the US finance industry (and population) as a whole, has cumulative exponential interest front loaded in, and then broken out over the anticipated life of the loan (30 year, 5 year, whatever). Which is why one ends up paying $300,000 total sum for a $70,000 principle home loan, or $40,000 for a $20,000 vehicle. The magic of compounding interest is foisted upon the credit-seeker, independent of whether they make regular and on time interest payments or not, and the only way to avoid such is (in some cases) to pay it off early (assuming that it allowed).
Simple interest is largely only found in the consumer credit card industry.
Thus Jtabeb's point is sound.

I agree that this is very similar to -- or the same as -- simple interest. JT's point, I think, is that he wants neither debts (nor assets) to grow by compounding. However, it seems to me that even if the borrower's debt doesn't compound, the lender has the opportunity to compound his profits by 'renting' out the profit on the loan to another borrower.

JT -- in your proposed system, would the 'rent' payments on borrowed money drop as you paid back the loan principal? Unlike borrowing a ladder, you can return a portion of the money that you borrow over time.

[jtabeb]

Re: Wealth Distribution

If the principle is not repaid, that's default I suppose. I am unable to guess why you mentioned non-payment of the principle.

But that's my point, this doesn't define default. In fact there are more than a few loan products structured so that "interest only" and even worse "negative amortization"
are contractually specified as the minimum monthly payment. Meeting you minimum monthly payment does not constitute a contractual definition of default last time I checked.

The point is:

Simple interest
Monthly compounding
Daily compounding
Continuous compounding

All of these amortizations produce a compounding debt load. I don't see where you can disagree with that. In all cases paying the minimum payment contractually due yields total payments that are at least 2 (if not 3 or four times) the original amount borrowed.

And again this is precisely my point.

Most of the debt in this country is UNPAYABLE because it is ONLY serviceable with the ZIRP facilitated by the FED AND because min payments are so low.

ANYTHING in that equation changes, and it becomes readily obvious that we are in the final stages of a Ponzi Finance system. (You can't even afford to roll over the debt).

Sure, if you weren't allowed to get a NIJA Neg Am interest only loan (and then have the banks securitize these products with a triple-A rating and sell them to investors and then short them after they were sold) then we wouldn't be here.

But the point is these things ALREADY happened, we are already at the ponzi state of finance. And once you have crossed that threshold, you don't go back to sound finance, you collapse. Just like every ponzi scheme is destined to do.

In the AFTERMATH, when the system is redesigned, I don't think we should allow it to BE POSSIBLE that we end up in exactly the same place we are now. And the exponential financial and monetary system is exactly how we got here (with a hearty dose of fraud, corruption, and willful ignorance thrown in to boot).

If you allow something to be possible, there is a chance it will happen. We should not be willing to allow to possibly occur in the future. The only way to do this is to make such an outcome IMPOSSIBLE, by design.

[Serge_Tomiko]

Re: Wealth Distribution

Thanks for embedding the graphs, Rajiv.

This brings to mind the observation that our ideas about what America is are largely taught to children based upon what America was... and that some of the ideas about national identity which persist in adulthood are based upon our perceptions when those ideas first gelled. I think most of my ideas about America were formed between the ages of 5-15, which spanned the 1980's. Looking at graph #2, it seems that my perception of America as a land of relatively high social mobility and opportunity was true... in the 1980's.

Now here's the tricky bit -- my household income is at about the 85th percentile, nationally... and it was closer to the 97th percentile when my wife was working -- and I'm not really volunteering to give any of that income up for the sake of a more even distribution. Both my wife and I came from middle-middleclass families, so our current circumstances reflect upward social mobility (albeit more like half a rung than a rung). I'll support policies that seem likely to raise the value of labor at the low end -- and to curb passive gains from non-labor income (i.e. investment income) at the high end -- but I must admit I feel "entitled" to compensation that reflects some combination of the scarcity of my particular skill set in the labor market, and the impact of my labor upon my employer's revenues. Where does that leave us?

And for the record, I find the new post-editing window very frustrating, because it takes it upon itself to re-center the text window while I'm trying to edit the post. Perhaps there is an option to adjust this behavior, but I wanted to add my own griping about the 'upgrade' (to no one in particular).

EDIT: My perception is that two different mechanisms drive widening income disparity. First, FIRE enhances income disproportionately at the very high end of the distribution, and is responsible for a lot of the income growth for those who mainly live off of passive investment income rather than their labor. On the other hand, it seems to me that trade and immigration -- labor arbitrage, in general -- is responsible for falling wages at the low end. To over-simplify, the value of American labor was higher when America had more of a monopoly on modern factories and an educated work force. Stagnation of wages at the low end of the scale... and creeping progression of where 'the low end' starts, seems like a natural market consequence of global development and "free-ish" trade. (Being a 'natural market consequence' doesn't make it a good thing, socially... but it means we have to choose between goals for the structure of society and cost efficiency.) For that matter, the combination of a very uneven income distribution with high social mobility would be a lot more tolerable than an uneven income distribution and stagnant social mobility. By one set of ethics, an uneven income distribution is "just" to the extent that it reflects labor market conditions, and the moral goal would be to promote mobility within that distribution, based upon merit rather than pedigree. (And, of course, there are other sets of ethics.)

A very good analysis Ash. I always find your posts very articulate, reasonable, and more importantly - personal. Very persuasive.