Friday, May 23, 2014

April 2014 Consumer Prices

The CPI numbers for April were released late on Wednesday, and they point to benign inflationary pressure (log annual and monthly changes; 2000=100):


The annual change is still high, but the monthly growth numbers show the impact of price hikes of subsidised goods has dissipated away, showing little in the way of any pass-through into other prices.

This is more clearly seen in the movement of the underlying indexes (index numbers; 2000=100):


All three of the indexes I monitor – headline CPI, Core inflation, and the Pain index – have flattened out over the past two months. In fact, the Pain index (food + transport) has been effectively flat since the turn of the year.

Looking at the detailed breakdown, there have been price increases in health and to a lesser extent in education and transport, while prices of communications, food and clothing have dropped. These price movements more or less cancel out.

Price increases (with the exception of communication) is largely being driven by services based price increases, which is as it should be – that’s symptomatic of higher wages (aka labour costs), which is something I think is a necessary concomitant of becoming a high income economy.

More to the point, this underlines the point that if BNM were to raise the OPR at the next MPC meeting due in July (word on the street is that they will), it’s not going to be because of inflation or a negative real interest rate. The real interest rate is about as positive as you’d want it to be:


The key words used in the last MPC statement was about financial imbalances. While I don’t necessarily agree that this is likely to arise – all the signs point to a declining momentum of growth, 6.2% 1Q2014 GDP growth notwithstanding – I can’t discount the possibility. Let’s just not pretend an interest rate hike has anything to do with inflation.

Technical Notes:

April 2014 Consumer Price Index report from the Department of Statistics


  1. Hi

    Just being naughty but what do you think of this dude:

    Pump priming aka QE aka easy money aka many things else is not the way to go then?. By the way, I just came away from looking at the monthly BNM report after shooting some super grass and guess what? loans growth for households held constant at 11.9. ( page 4).

    Interestingly M3 growth is continuing to trend downward yoy, signs of tightening ahead and of the reckoning times.

    Seems to me many of the numbers like, credit card, personal loan, housing loan etc since 2011 support the contention that debt induced income is driving private consumption, a large segment of Domestic Demand aka DD. Oops there I go again.......reigniting our mental brawl......hahahaha.....ok I just saw some birds, time to trap them......hahahaha

    Warrior 231

    1. Warrior,

      Yes, you're being naughty.

      1. Anytime you read the words "fractional reserve", you might as well ignore it, because whoever wrote it doesn't know what he's talking about. Fractional reserve is an accurate description of the banking system - 100 years ago.

      2. There's a simpler and much more fundamental reason why private consumption has held up over the past few years. Debt-based consumption was a factor, but only a minor one. BTW, housing loans contribute not to private consumption but private investment. Cars however, fall under consumption.

  2. Come on dude is that pure disdain or more of a stab at the Austrian school or even Hayek.

    I may not agree with Hayekians but they do have some points worth reflecting upon. And chill out, man, he did mention the fractional reserves thingy referred to 19th century scenarios. Hope you are not of the burn the book close your mind Shih Huang TI has cost them dearly ever since........hahaha

    Have a read first, it will not ruffle your Keynesian sensibilities or tax n spend leanings an iota. He sounds like a sensible sort of a counterpoint to Picketty.

    Wonder why we Malaysians have something leery about other ecumenicals? The Shias spring to mind, for instance...ah well.. I digress ....hahahaha

    Warrior 231

    1. Warrior,

      As I said earlier, my time is severely constrained these days, and I have to prioritise. Fractional reserve banking is so totally divorced from the way banks operate today (for that matter, for much of the past 200 years), that the concept has lost any analytical relevance. I might read about archaeological curiosities waiting for the dentist, but not if I have a choice.

      The reference to closed minds is richly ironic, considering we're talking about Austrians here.

  3. Hey dude, don’t spin the fractional reserve thingy as a get out of jail thingy. This is what the chap said about “fractional reserve: and its all within a 19th century context:

    “MI: Someone who objects to your argument might say “Just look at the 19th century. That was a period with a gold standard and capitalism, and yet we saw lots of inequality at that time, didn’t we?”

    AM: In that case, banks had the privilege of holding only a fractional gold reserve, which is clearly not a true gold standard. That is, they still could create money out of thin air and give it to some people, while others did not receive this money but had to deal with prices that were higher than they otherwise would have been. So there was indeed a redistribution stemming from the inflationary production of fiduciary media also in the 19th century. And in that case also, the redistribution had a tendency of being in favor of the already well-off since the already-wealthy could provide better guarantees for the loans created out of thin air. Of course, the scale of the monetary redistribution of the 19th century was tiny in comparison with the creation of fiat money today.”

    See! he wasn’t even linking FR to contemporary times. In simple language, back in the 19th century, FR was the mechanism for money creation ergo inequality… fiat money aka printing press.

    Keynesians are spooked by these arguments because they cannot counter as if Picketty found the holy grail for Income inequality and that’s it!

    I am not saying who’s right or wrong but being dismissive of an alternative hypothesis smacks of the Shih Huang ti-dom syndrome that operates by the maxim: if the argument doesn’t fit, lit it!!!

    Jeepers that’ s exactly what the local B(u)Nians and P(a)Rians subscribe to….shut the minds to anything contrarian lest it pokes a hole in the cocoon….

    No wonder Malaysia is teeming with ideological and philosophical road hogs holding up the traffic . If the educated ones cannot get the drift, what hope is there…I give up!!

    Warrior 231

    1. Warrior,

      Now that you've quoted from the piece, I'm even more glad I didn't bother reading it. Typical Austrian approach - only take the narrative that confirms their world view, and completely ignore any evidence to the contrary, like the fact that global inequality generally declined (and financial inclusion increased tremendously) throughout the first half of the 20th century even as fractional reserve banking was replaced by endogenous money. But then, Austrians reject all empirical and statistical evidence don't they? Never mind also that inequality was persistently higher in the pre-industrial age, when money was fully backed.

      I looked at Austrian capital theory a long time ago. While some of their ideas are interesting, I'm afraid as a whole it bears little relation to the real world.

      Thank you for giving up.

  4. You just affirmed the guy’s contention, dude…hahahahaha

    He said one cause, to explain inequality during the 19th century industrialization era ,was the existence of fractional reserves that allowed banks to create money outta thin air and dole it out to the rich ergo inequality.

    Now, you just said that FR disappeared from the early 20thcentury onwards with the advent of endo money precisely affirming his point i.e., extinction of FR = reduced inequality.

    What you failed to mention too was that fiat money creation was not pervasive in the early 20th century simply because Keynes wasn’t there to feed the gomens the world over, his brand of vodoonomics…hahahahahaaha. If that had occurred, you would have seen inequality spiral as the Austrian thesis goes.

    It would be interesting to compare the growth of fiat money pre-Keynes and post-Keynes to see whether the Austrian contention holds, and by the looks of it, ah reckon it does……..hahahahaha

    As for the pre-industrial age, wonder how equitable or 'socialist or welfarist" nation states were back then or did the Malacca sultanate have a NEP going for the backward Chingkies....point is a whole lot of socio-political factors counted than money fully backed.

    And back to contemporary times, everyone knows that inequality is also inextricably linked with wealth redistribution, given that, the already loaded will always have a head start to leverage upon. And so a wealth tax seems no longer an oddity not because Picketty says so but precisely cos I have been shouting for it in posts past here….

    Nah, I dint give up on you, man. It was more on Malaysia’s ideological roadhogs who throw a realist's pragmatism outta the window just because certain things don’t jive with their world view. It wasn’t aimed at you at all, rest assured.

    And thanks for the engagement, you need not respond as I do understand your time constraints, honest. And thanks for the friendly banter……hahahaha. After all, what are cyberspace chums for ..(ROFLMAO)

    Warrior 231

    1. Warrior,

      Far from proving the fellow's point, I've largely disproved it. Fractional reserve banking refers to creating money out of thin air based on a stipulated level of reserves - deposits create loans. The present system creates money out of thin air on demand - loans create deposits.

      The former depends on an exogenous supply of reserves. The latter depends on supply and demand for loans, restricted only by a stipulated level of capital. These may sound similar, but the differences are profound. Where they do not differ, however, is that money is still fiat-based (created out of thin air), which puts the whole credit=inequality argument on rather shaky empirical ground.

      "point is a whole lot of socio-political factors counted than money fully backed"

      Precisely. But this is as relevant for the modern age as it is for the pre-industrial age. Unfortunately, the Austrian answer for most all economic problems (not just inequality) goes back to only one answer - get rid of fractional reserve banking, which of course, no longer happens to exist.

      BTW, just because Piketty has made it fashionable doesn't make a wealth tax any easier to implement. You might want to read this for an alternative.

    2. Warrior,

      Well done, you're thinking like an Austrian. Note that "out of thin air" pretty much describes nearly all money creation for the past 200 years, a period which also happened to coincide with an unprecedented increase in rising incomes and prosperity, and generally falling inequality. But that's totally unrelated, right? Taking isolated exceptions doesn't invalidate the historical experience.

      For an "official" description of modern money creation, I'll let the Old Lady of Threadneedle Street speak.

    3. Warrior,

      ROFLMAO - how does government spending relate to fiat money? All that weed is burning your synapses.

      Yes truce...before I die of laughter!

    4. Oooppps , wrong chart (red faced) uploaded in inebriated state and what we have here….. aww schucks!! our serious stiff upperlipped blogger having a laugh at my expense but, honestly, its nice anyway knowing that he is lolling about the floor in delight…….sheer ecstasy aint it mate (LOL). Mamamia …….how nice to know you must be beaming from ear to ear…while I salve err…my wounded pride…….. with elastoplasts (hahahaha) Nope please dont die......(sob...hahaahaa)

      Ok with real genie gone, grass smoke and vodka aka early morning binge fumes outta the way what do we have here,hombre?
      Hey wait a minute, the Austrian in me hasnt been Czech mated yet hahahahahaha

      Here is the actual debt data for the said 1913 to 1930 period (note Gini only came into being 1912 thereabouts):

      Here ‘s the same thing in nominals

      And the gross figure:

      You definitely know how to fiddle the controls so no need for tuitions …..hahahaha.

      Now map the Gini from Fig 3B from here:

      and see how she’s gets aroused just like in the Japanese case.

      Just to illustrate the point further, here’s top 1% gains in the same period:

      or again here for a better view (Figs 1 and 4 )

      and note 4 talks about inequalities within the top 1% aka , money begets money!!. Do the same thing for the US all over since 1990 onwards and the end result is the same.

      The rest of my contentions stands, mister…..i.e., spigot and GINI, historical fact being an unexplored myth and the wealth tax or culling thingy but not seig heil (wink) wink)…….hahahahahaha

      Maybe I will leave this to be chewed upon, after all we Malaysians are on par with the US when it comes to the Gini:

      “Raghuram Rajan, a professor at the University of Chicago's Booth School of Business and a former chief economist of the International Monetary Fund, believes governments tend to promote easy credit when inequality spikes to assuage middle-class anger about falling behind.
      "One way to paper over the rising inequality was to lend so that people could spend," Rajan said.

      In the 1920s, it was expansion of farm credit, installment loans and home mortgages. In the last decade, it was leveraged borrowing and lending, by home buyers who put no money down or investment banks that lent out $30 for each $1 held.

      "Housing credit gave you an instrument to assist those falling behind without them feeling they're beneficiaries of some sort of subsidy," Rajan said. "Even if their incomes are stagnant, they feel really good about becoming homeowners."

      Here’s the full stuff:

      Now for some grass....

      Warrior 231

    5. hahahahahahahahaha...I can't stand it...hahahahahahaha

      It's fractional, no, wait, it's socio-political factors...oh,oh, wait, it's government spending...hahahahahahaha

      Czech? Czech is right, your logic is so full of holes, it's like a checkerboard..hahahahahaha

      *cough*cough* I need a defibrillator

    6. Had ur moment already,Mr Joker? Too much laughing gas,eh mister? Yeah,you better get hold of that defibrillator double quick,mister for this what you wrote:

      "Taking isolated exceptions doesn't invalidate the historical experience."

      You called Japan an aberration but when I give added evidence you go errr..berserk...

      I dint talk about FR. It was a 19th century mechanism to create money outta thin air as you put it.

      ok, gomen spend to fiat money was a mistake and I immediately owned up to it.

      and sociopolitical factors like regulations, new deals etc are what that kept income inequality in check...otherwise.....

      Interestingly,you avoided money supply issue and a wealth tax is definitely anathema to the likes of you, Mr Joker for obvious reasons.......hahahahahaahaaha (ROFLMAO)

      Follow the arguments carefully dude,including yours before switching on the laughing gas for its known to kill.

      *choke*choke*choke* what a twisted pretzel!

      Warrior 231

    7. ROFLMAO, what money supply issue? All you're showing is government debt in relation to GDP. What's that got to do with money supply? I can't "ignore" an argument that hasn't even been made yet, especially since you're changing the goalposts every other comment. Did you even look at money supply growth before posting all that?

      Also don't forget the denominator in those debt ratios and all the other things going on during and after WWI that affected global balance of payments and flows of capital.

      And a wealth tax is NOT anathema to me - it IS the most efficient way to inhibit inequality, especially since wealth inequality is generally at least twice as high as income inequality. Note the effectiveness of estate taxes in the UK in dismantling the landed aristocracy.

      I just don't think a general wealth tax is really workable now. Before the 20th century, capital and wealth were synonymous with land and agriculture, where values did not fluctuate much. Those with financial assets were a small minority, A property/estate tax made sense, and could be effectively applied.

      That's not true today, where wealth takes on many, many forms, some of which are not tangible and where valuations can change by the second, How do you fairly apply a wealth tax on such, without being unjust?

      I'm reading PIketty at the moment, though I haven't got around to his policy proposals yet. I'll post on it when I've finished the book.

    8. Oh BTW, you might want to consider this source for high income shares:

      Estimates for Malaysia are included, from 1947.

  5. Wow... So cool your arguments. I wish I was that smart... But back to the post, as an uninitiated sotong from down South (can you call us Sporkeans, not Sporkians, Warrior?), are you saying that given the latest inflation figures, it may not be a good idea to raise OPR in the first place? And "word on the street"... how certain is that? Has BNM changed its mind before?

    1. Surgeon General's Warning: Ignore this troll for the sake of your sanity....

      The Snail

  6. Sorry, my question was to Hisham actually, the gist of which is:-
    "Are you saying that given the latest inflation figures, it may not be a good idea to raise OPR in the first place? And when you say "word on the street"... how certain is that? Has BNM changed its mind before?"

    1. @The Slug

      BNM uses a variety of indicators to assess its monetary policy stance, unlike the strict rule of inflation rate targeting used by e.g. the central banks of the UK, Thailand, Korea or Indonesia. But looking at some of these same indicators (inflation, imports, loan growth, capacity utilisation, employment, output gap, among others), I don't see a good argument for raising the OPR just yet.

      As far as word on the street is concerned, virtually every research house covering Malaysia is forecasting a 25bp rate hike in July - the last MPC statement was a clear statement of intent. Whispers from inside BNM suggest the MPC is certainly leaning that way as well. Markets have already partially priced in an increase in the OPR, and would react sharply if it doesn't appear as expected.

      The big if will be if data released between now and July clearly show a slowing economy, which is a possibility, though not strongly enough I think for BNM to hold back - even if I disagree with the necessity.

  7. Thanks so much! And then almost immediately, the BLR will adjust by the same amount, I suppose?

    1. @The Slug

      Absolutely, though for most people it won't amount to very much. Also, for new borrowers, a rise in the BLR isn't really relevant, because long term lending rates are almost independent of BLR (and OPR for that matter).

  8. Hey Joker, the game’s over. Gotham’s loaded fat cats need a workover and Bane is gonna deliver the comeuppance on behalf of the proles. And you better wipe the laugh off your face and switch off the gas for Bane here is just starting!!

    The reason why I put those debt to GDP figures up is to show that debt impacts on the GIni negatively as growing debt redistributes income away from the poor and the middle classes to the rich via interest payments. In the case of debt being predominantly domestic held, the net impact of such wealth redistribution is aggravated (example: cue Spork) and a fact demonstrated here;

    My contention above is proven by the GINI figures for both Japan and US which spiked in tandem with the growth of debt as I proved with my earlier comment on Japan and the US around WW1 and immediately after which you scoffed at, joker style!!. Please reread my post about Japan, for instance.

    There was no balance of payments, denominator..blahblahblah as you averred there. Simply put, debt up, Gini up, fact, end of story.

    And before you come up with a rejoinder how that debt promotes income growth all round in the long run, here is my right uppercut. That is not the case in the US during the latest spike in debt that started in 1980. As debt increased so did inequality in tandem. This is exactly as predicted by among others:

    a. Michl, T. R. 1991. Debt, deficits and the distribution of income, Journal of Post Keynesian Economics, vol. 13, no. 3, Spring, 351-365

    b. Heilbroner, R. and Bernstein, P. 1989. The Debt and the Deficit. False Alarms/Real Possibilities, New York, W. W. Norton (see page 50 of that tome)

    c. Baldani, J. and Michl, T. R. 1987. A balanced budget multiplier for interest payments, Journal of Post Keynesian Economics, vol. 9, no. 3, Spring, 424—439

    For instance, Micahl estimated that the top 20% of the income class receive up to 86% of all direct interest payable for treasury bonds.

    Now that explains why the wealthy connive with the politically powerful to pile on the national debt with the support of crooked economists of course…….hahahahaha.

    Sometimes I wonder, how governments have the conscience to rip off the ruled as John Stuart Mill eloquently puts it below. But then again being in cahoots with crooked economists, financiers could be one way to rationalize the “unrationalable”. Mill and whoever be damned

    “The question must now be considered, how far it is right or expedient to raise money for the purposes of government, not by laying on taxes to the amount required, but by taking a portion of the capital of the country in the form of a loan, and charging the public revenue with only the interest. * * *[I]f the capital taken in loans is abstracted from funds either engaged in production, or destined to be employed in it, their diversion from that purpose is equivalent to taking the amount from the wages of the laboring-classes.”

    Mill (The Principles of Political Economy, Chapter V, “Of a National Debt ,” 1848, )

    Damn the bloody economists and financial chattering classes!! hahahaha

    Warrior 231

    1. ROFLMAO...the goalposts have changed again, now they're way off on the sidelines!!

      Finally sober huh? Now you're finally making some sense. What happened to the "money supply" argument? You sure you're smoking weed, or something a mite stronger?

      Sure, money makes money, and increases in the supply of financial instruments would certainly be a cause for increasing wealth inequality. I can buy that - in fact, that's the whole foundation of Piketty's thesis on capital based wealth inequality.

      Pinning down government debt to this dynamic however is probably not a good idea, especially if you use ratios. Nor can you ignore specific circumstances that changed relative wealth between nations during that period (I was a student of military history in a former life).

      Take for example denominator effects. The US Govt essentially stopped borrowing from 1919 onwards, yet the debt to GDP ratio continued to rise for a few years, because the economy fell into recession from which it didn't emerge until 1922. Looking at the debt to GDP ratio doesn't make this obvious, and makes correlations with other variables a little spurious.

      Second, there was a huge transfer of wealth from Europe (both winners and losers) to the less involved victors of WWI, particularly the United States but also including Japan.

      The US functioned as an industrial base for the UK and France during the war years, supplying arms and munitions on a massive scale, enriching such companies as Dow Chemicals. These were financed by asset sales, official and private sector loans and issuance of public debt - UK national debtincreased five fold from 1914 to the mid 1920s. Read Ron Chernow's House of Morgan to get an idea of how Wall Street financed the British government. The US turned from a net international debtor before the war to net creditor after it, and accumulated the world's largest stock of gold reserves.

      Third, much of this borrowing was spent directly on the war effort, which obviously benefited owners of industrial capital, and not workers or the populace generally. That changed in the 1930s as governments turned more socialist, and started borrowing to fund social welfare i.e. the character of the link between inequality and government borrowing can and has changed.

      Fourth, there's the crowding out effect - higher government borrowing and expenditure, in the context of a fully employed economy, simply displaces private borrowing and expenditure. The supply of public financial assets all other things equal, displaces the issuance of private financial assets. This would especially be true of military expenditure, which doesn't increase the productive capacity of an economy.

      In short, it was British and French public debt that raised private incomes in the US not US public borrowing, which was minuscule by comparison. More than 40% of 1920s government spending in the UK was absorbed by interest payments. The UK only paid off its WWII debts to the US in 2006; the WWI debts are still outstanding.

      So, is there a case for wealth inequality being driven by public borrowing valid? In the right circumstances yes (it depends crucially on the rate of return), but trying to make a story of country specific public borrowing and changes in income and wealth inequality without the context is, shall we say, a bit of an opium dream (u sure it was weed bro)?

  9. ROFL......Dude, I am on the road but thanks for the laughs. You see your fairy tales were so full of holes that you could drive a Hino and a Volvo truck side by side through them and still have some room left for a Beemer....hahaha. Thanks for the entertainment, old chap!

    For starters I noticed you avoided the 1920s in the States. Well this will jump start the dummy upstairs:

    And there were more such "avoidances" elsewhere on other core issues, enough to render you the consummate contortionist!

    Money supply, Japan,.........well I will talk about them later when I get back, save to say your response hardly dented the core maxim: Debt up, Gini up, as redistribution of income kicks in via the interest mechanism.

    And you just gave me more ammunition to shoot you to smithereens with your classic piece of loconomics.........hahahahaha. So for the time being digest what I gave you for when Bane gets going you better run for yer life, Joker! Or should I just call you Batman, the defender of wealth and exploitation.....hahahahahahaha

    P.s : the weed's good, mate. Its high quality stuff as is the grog and birds, I take a fancy to, so don't worry about it. See yah soon....can hardly wait .........ROFLMAO

    Warrior 231

  10. Dude, I thought of you, just as I was about to mount my Harley for a day of rides, grog, weed and birds. Thought you would like to catch up on some quickie history to update yer synapses despite that past military avatar.......hehehe. Don't worry, my great gran pappy fought Geronimo and Sitting Bull too before being involved in getting Lee's surrender at Appomatox .....hahahaha ROFL. Here, since you have time constraints which me a Bohemian understand, focus on the paragraph right after the Liberty caption, above Table 3.

    That will give you an idea of which income segment were holding the bonds,the Brits and French were paying for. Nice sleight of hand wasn't it, eh Joker, I mean not stating the main beneficiaries in your fairy tale........hahaha. It's all part of the banter, mate, so don't cha get worked up over nothing.

    So that will keep u occupied while I ride but remember it ain't about WW 1 and the US alone.
    Ok Harley baby, time to move and jive, giddy up day ahead......hohoho here I go

    Warrior 231

  11. Oops, forgot this. The graph gives a convenient snappie selfie of 1920s debt holdings. Note the right side as well from circa 1980

    Ok cheers

    Warrior 231

  12. Dude, you got me...straight to the heart...Farewell cruel world!!!!

    But...what is this? The goalposts have changed yet again?! It's all the way on the other side! He dribbles...he's through...he scores an own goal!!!

    In case you totally missed it, I was talking about 1920s America:

    "The US Govt essentially stopped borrowing from 1919 onwards, yet the debt to GDP ratio continued to rise for a few years"

    But, oh, the Cato Institute paper doesn't appear to be talking about government debt, it's talking about government expenditure. Could it be that the great Warrior has so fried his brain that he cannot tell the difference? Could it be that with all the evidence and resources at his mighty disposal, the Warrior somehow missed the fact that the US govt ran a balanced budget for most of the 1920s? Say it ain't so!

    Pulling your leg dude, both of them.

    Just to be clear - that inequality increased in the early part of the 20th century is indisputable. The question is how and why. Your contention is that money financed public debt issuance played a major role, mainly through increasing the holdings of interest paying financial assets by the already wealthy. Thus money begets money, and inequality increases.

    I agree with the latter, and disagree with the former - comparisons between countries and across time is too persuasive. For instance, if that hypothesis is right, please explain the WWII experience to me, especially for the US.

    You have a little germ of truth here regarding QE, but you've completely bollixed up the transmission mechanism. I'd explain why (and I've found the data to back it up), but then it's too much fun watching you dig your own grave.

    But journey, and an equally safe return home.

  13. Warrior

    LOL, now you're getting somewhere. But you're proving my point - socio-political and institutional factors determine the relationship between public debt and inequality. It's not as simple as +public debt = +Gini.

    You're absolutely right that the change in public policy during the Great Depression, and even more during WWII helped bring down inequality even as government debt galloped higher. That's true of not only the US, but many other countries as well, especially with the turn towards socialism and Keynesian macro policy.

    But if such changes mitigate the impact of debt on inequality, then the straightforward equality cannot hold. In other words, you're barking up the wrong tree.

    If you think that was a feeble red herring, explain to me Malaysia's experience since Independence. Explain to me the post-1980 OECD experience (including the US), which in summary goes like this:

    +debt = +Gini
    +debt = -Gini
    +debt= No change in Gini
    No change in debt=+Gini
    No change in debt=-Gini
    No change in debt=No change in Gini
    -debt= No change in Gini

    There's simply no systematic relationship between the two. It depends on the country, the particular institutional arrangements within and between countries, and even for the same country, on different points in time.


  14. [cont]

    You also have this charmingly naive view of the relationship between government debt, the money supply and inequality. I will try to explain it in two syllables or less:

    Assume government issues an extra $100 of debt. All other things equal:

    1. The debt is financed by the private sector. Government (oops, that's three syllables) doesn't spend it and keeps money at central bank. Result: Interest (oops, another three syllables) rates increase, and money supply decreases by $100.

    2. The debt is financed by the private sector. Government spends the money instead of keeping it. Result: Interest rates increase, but there is no change in the money supply.

    3. The debt is financed by central bank. Government doesn't spend it and keeps money at central bank. Result: No change in interest rates or money supply.

    4. The debt is financed by central bank. Government spends it Result: No change in interest rates but money supply increases $100.

    Bottom line: an increase in public debt does not necessarily imply an increase in the money supply, and or on inequality. It depends crucially on how it is financed and whether it is spent. What the government spends on is also important - spending on military hardware probably increases inequality, spending on social programs probably decreases it.

    A related point: additional supply of government securities to the private sector generally causes interest rates to increase. New bond holders enjoy higher interest income, but not current bond holders. However yield on current bonds will increase because bond prices fall (i.e. higher return), but that fall in prices causes a capital loss (decrease in wealth). So its a toss-up whether this is positive or negative for bond holders in general.

    Another related point: quantitative easing, by virtue of increasing the absolute demand for government securities, creates capital gains but also reduces yields. Again a toss-up on which effect predominates for bond holders. The available evidence suggests the former i.e. your idea that increased debt issuance via QE raises interest income streams for the rich is wrong. The opposite is true.

    A third related point is that yields on government securities underpin the entire credit market i.e. both spreads and term structure of private debt. The impact of QE and money printing in general is thus indirect, and mainly through the effect on the private cost of borrowing (and thus investment), and not through holdings or income streams of government bonds.

    Which is more or less what I was trying to point out before on the US WWI and post-WWI experience. Inequality didn't rise because of interest income, it rose through industrial expansion and corporate profits. Piketty pointed out the same thing at numerous points in "Capital" (which I've just finished). But this effect is time-varying, and state-dependent, i.e. don't bet on a straightforward relationship here either.

  15. [cont]

    Just to be clear - the main driver of income and wealth inequality, as documented by Piketty and others, is via wage income, corporate profits and dividend income (for the 20th century anyway; land rent was bigger in the 19th century).

    Interest income has never been a major component for either the top 10% (primarily wages) or the top 1% (split between labour and non-labour income).

    It's interesting to note that the ratio of interest income to total income in Japan dropped in half, right about the same time they started printing all that money in the 1930s.

  16. I had a good chuckle reading your response two nights..err.. predawn mornings ago….and almost choked on the vodka when reading your moves…hehehehe.

    Couldn’t do much yesterday as I slept in most of the time….washing away the effects of vodka and weed from our post-journey do plus all the hangover from that 1 week joyride….hahahaha

    So here I am a bit refreshed and taking up the cudgels once more. Back from the grave digging as you would say.

    Dude, I do admit that you have some valid points in there but on the whole, they hardly dent debt + =Gini + Rather they reinforce it ….a bit ironic isn’t it as you are also claiming that I reinforced you..hahahahaa. So howzat?

    You see by conceding the role of socio-political policy in keeping the Gini leashed, you are by default implying that without that socio-political leash, the Gini mutt would have run amuck when the debt lamb chop is dangled in front of it. To put it succinctly:

    1. Debt + & Socio-political policy = Gini controlled
    2. Debt + - socio-political policy = Gini uncontrolled equals to Debt + = Gini +

    Gotcha there didn’t I?hahahaha…….in fact if you take “equation”(a) and map it to all those OECD figures you mentioned, you will find it holds….

    By the way,.aw..shucks man…you threw me a dead sardine there didn’t you? How am I debunk you on that OECD one without the data….and threw in the Malaysian experience for good measure. Poor me…..seems like I have to prove it country by country or continent by continent !!!hahaha

    Speaking of data. I should thank my arwah brother for leaving me a treasure trove of his papers. He played a pivotal role during cap control days of 1998 but for his unfortunate demise a couple of years later, he would be going hammer and thongs with you, but maybe not debt-Gini ah reckon hahahaha!!. But lucky me, a self unemployed consultant engineer cum man of leisure, for I had the good fortune of brotherly advise to avoid economics like the plague cos it is a pseudo-science trying very hard to be real….hahahahaha

    Anyway, thanks for the mini-tuition, brought back memories as it was déjà vu, with arwah written all over it. I observed too your cute quixotic notion that (a),(b) and (c) are the norm when reality and me barks that (d) is usually the fact. But, rest assured I will not start another tangent with debt induced money supply’s link to Gini.

    Instead I will just wrap up by tying a few loose ends with some slamdunks with the odd football slalom thrown in (since you love goalposts)…hahahaha

    Warrior 231

  17. Part 2
    Having established the debt+ = Gini + relationship, lets finish by observing the following

    1.Firstly, does debt have a flow through effect on incomes via the interest mechanism?

    Essentially, any decrease in debt would lead to losses in interest incomes and thus impact on the GINI.

    Calibrating an Overlapping Generation (OLG) model to US wealth and income distribution, this paper notes that even adjusting debt to its sought after optimal levels will yield a loss to the creditors:

    “Starting from the calibrated value of a debt to GDP ratio of 50%, decreasing debt increases the capital stock, hence depresses the rate of return. Additionally, welfare gains come from increasing transfers (providing more insurance) and rising wages. However, as the government’s income from capital taxation decreases due to lower interest rates and all other expenditures and tax rates are fixed, transfers must eventually decrease (starting at about 40% of net government assets) to balance the budget. Panel b) of the same figure decomposes the aggregate welfare change for the different initial labor market shock realizations. What stands out is that agents with the best shock (η= 4), experience large welfare losses. The reason is that they start their lives as wealthy agents and suffer from the drop in interest rates.”

    In simple language, decreasing debt increases wage income benefiting the lower income groups and accruing losses in interest income for the wealthy/loaded as capital stocks increases.

    He dribbles, he shimmies down the lane and Kobe leaves both Lebron and Wade wiping the floor and there is slamdunk 1...(LOL)

    2.Is there a correlation between domestic share and Gini? Yeah….and Kobe moves away just as LeBron’s desperate lunge catches thin air...ooops…….slamdunk 2:

    “We have found consistent evidence using both fixed and random effects that the domestic share of public debt is associated with higher levels of the Gini coefficient. The results persist when we add other control variables that are correlated to both debt composition and inequality as well as when we add variables that might affect the relation between debt composition and inequality, including government spending on a variety of sectors. Our findings are also robust to using alternative measures of the variables and to using lagged values of the explanatory variables of interest.”

    For a classic case of how domestic share of debt impacts on the Gini,look no further than the medieval city of Singapork since circa 1990, enough said.

    3.Does social policy have a role in shielding Gini from rising debt. Probably used to but no longer…… as Kobe dunks a reverse no hoop see move to the awe of LeBron, slamdunk 3!!:

    “Finally, income taxes and cash transfers became less effective in reducing high levels of market income inequality in half of OECD countries, particularly during the late 1990s and early 2000s”

    Something also observed on the other side of the Atlantic here:

    4.How important is capital income (including interest transfers)…… oh here is Messi on another run leaving David Luiz and Fred cleaning their bottoms…….hahahaha:

    “A much debated driver of income inequality in OECD countries is the distribution of incomes from capital, property, investment and savings, and private transfers. Such distribution has grown more unequal over the past two decades. Capital income , in particular, saw a greater average increase in inequality than earnings in two-thirds of OECD countries between the mid-1980s and the late 2000s”

    All the above in their own ways echo the same inevitable conclusion ; debt + = Gini +

    Warrior 231

  18. Post script.

    So is debt bad for equality? The available evidence suggests it is, irrespective of how its spend or the social policies designed to contain it.

    To cut a long story short, if I am a conscientious policy maker as all warriors are, my brief from day one would be to curb the growth of debt, since it is welfare improving:

    “The model is calibrated to the US and specifically targets the income and wealth distribution which plays a key role in the analysis. The main finding is that instead of holding debt, the government should accumulate assets. The intuition behind this result is as follows. As the government decreases debt (or equivalently, increases assets) it also increases the total capital stock. The higher capital stock increases wages and decreases returns to capital. However, the observed wealth distribution is such that a large part of assets (capital) is held by a few. Hence, the majority of the population would benefit from higher wages but only a minority would loose from falling returns on capital. Consequently, a high aggregate capital stock (increasing wages) driven by low government debt is welfare improving.”

    And even if I am compelled to use debt as a tool, use it very sparingly.

    Conversely, an economist……working in the financial world….is likely to valorize the assertion that “debt is good, nay great, for everything, inequality included”. Why? periuk nasi mah wink wink….hahahaha.

    You see economic history will tell us the financial architecture of the US was put in place AFTER debt instruments like the Liberty papers came on the scene in WW1. That hunger for debt then spiraled into the private sector, cue stocks, bonds etc that fired the roaring ‘20s.

    Fast forward 1980s onwards, American debt begins to grow exactly when the switch was taking place from manufacturing to finance services and exotic new debt instruments were being created or bundled into existence and big sharks crazed by all that blood..ooops money began chasing the fastest way to make hay……the rest as they say is history undressing herself in front of the windscreen…..hahahaha

    So who stands to lose if the debt machine is switched off? Those in the financial sector of course, including ...err..economists…(ROFL)

    See how quality weed can teach you to make connections and linkages…wanna taste some, mate?

    I think I will rest my case irrespective of your rejoinder. Thanks for the time and banter dude….….cheers bro

    Warrior 231

    1. Warrior, Warrior, you're still not getting it are you? If you're going to claim +public debt = +gini is a universal rule, you're going to have to show that it actually does apply universally, and not just for a few. I’m not thinking as an economist here, more as a statistician. The way you’re going about it sounds like confirmation bias.

      I chose the US WWII example rather carefully, because it demonstrates the causality between socio-economic policy and inequality, with no impact on the debt-inequality relationship at all. Inequality in the US did not actually fall much during the Great Depression – at some points in the 1930s it actually rose, despite the New Deal, capital destruction and all. The biggest blow to income inequality was much more radical and all-encompassing – the restoration of the National War Labor Board at the end of 1941 as the US entered the war (here and here for example).

      The NWLB had total control over wages paid to management and workers throughout the war years, and was very progressive in its actions; essentially equal pay for equal work. Thereafter, women and African Americans earned as much as white, male workers in the same jobs; wages were also frozen except at the very bottom of the income scale. So not only were wages capped, but wage compression was happening at the same time, and this continued to hold, even after the war was over. But this suggests that income inequality is largely a social construct, not an economic one i.e. you can throw away all that fluff about income = marginal productivity.

      What does all this have to do with capital or interest income? Absolutely nothing. Yet while the government borrowed like mad, and printed even more money than in WWI, income inequality dropped like a stone. The top 1% share of overall income fell almost as much as it did in the stock market crash of 1929. Labour income is a much more important determinant of inequality than interest income, and has been for almost the whole of the past century. For the top 1%, business income and dividends become much more important, but labour income is still a major factor.

      Proof, if you care for it, comes from the World Top Incomes Database (WTID), compiled by Saez, Piketty, Atkinson and others. The data includes most of the OECD (but Malaysia is included as well), including, crucially, the composition of that income. Look up the database, and check the data on composition of income for the top 1% and 10%, specifically the data for the US, Japan and Canada. At no point does the proportion of interest income ever exceed 15% - most of the time, it’s around 5%. More interestingly, the ratio of interest income generally falls when the government borrows more e.g. Japan and the US in the 1930s. That kinda makes your entire thesis really wobbly – greater amounts of government debt appears to reduce the interest income going to the top owners of capital.

    2. [cont]

      As for the gyrations, it’s really not that hard to figure out who’s printing money, and who isn’t – it’s all there on central bank balance sheets. (b) actually is the norm, though there is a fair diversity among countries and it depends on whether you include central bank debt as government debt.

      For example in Singapore, it’s a straight mix of (a) and (b), even excluding MAS. In Malaysia, it’s wholly (b), and a mix of (a) and (b) if you include BNM. In the US, it’s currently mostly (b) and part (d). In India and Brazil, it’s wholly (d) and has been for almost as long as those countries have been independent.

      But this kind of diversity means that there can be no straightforward relationship between government debt and inequality i.e. there is no universal rule, which is what you are claiming.

      As for the papers you are quoting, how about these:

      Financial Globalization, Inequality, and the Raising of Public Debt

      “In this paper we propose a multicountry political economy model with incomplete markets and endogenous government borrowing and show that governments choose higher levels of public debt when financial markets become internationally integrated and inequality increases. We also conduct an empirical analysis using OECD data and find that the predictions of the theoretical model are supported by the empirical results.”

      Translation: inequality leads to higher public debt


      This increase in income inequality reflects both
      - Increasing inequality of earned income.
      - A tendency for the share of national income flowing to capital owners to increase at the expense of labour’s factor share. This is related to the increase in the importance of wealth which is considered in Section 2. And it tends to increase inequality, since wealth and incomes from capital are more unequally distributed than earned incomes.

      Translation: It’s about profits and dividends, and maximization of shareholder value. (The discussion on the role of landed property is VERY interesting and worth exploring further).


    3. [cont]

      Income Inequality, Sovereign Debt, and Public

      We develop a political-economic model of sovereign debt that shows that income inequality leads to popular pressures on the government to use foreign debt to finance a redistribution of income at the expense of productive public investment. Recognizing this fact international lenders impose credit ceilings with the consequence that developing country borrowers invest less and grow slower.

      Translation: Inequality leads to higher borrowing

      Unequal = Indebted
      In current research we therefore extend the work reported in “Leveraging Inequality” (F&D, December 2010), which dealt with only the United States, to include an open-economy dimension. We find (see Chart 1) that what unites the experiences of the main deficit countries is a steep increase in income inequality over recent decades, as measured by the share of income going to the richest 5 percent of the country’s income distribution.

      This increase in inequality has contributed to a deterioration in the richest countries’ aggregate savings-investment balances, as the poor and middle class borrowed from the rich and from foreign lenders. This, along with the other factors mentioned above, can fuel current account deficits.

      Translation: inequality leads to higher debt

      In practice, I’d take both the papers you quoted and all the above with a pinch of salt, as we’re dealing here with identification problems (the direction of causality and possibly omitted variable bias i.e. both public debt and inequality are being driven by a third independent process). Again, I’m thinking here more as a statistician. The causes of income inequality are fairly complex, and given the evolution that capital and labour incomes have undergone over the past century, simplistic answers risk missing the forest for the trees.

      As for finance, I just spent four hours lecturing over the last couple of weeks saying more or less the same thing, so who am I to disagree?

      But my focus was on private debt, not public debt – governments can counteract their impact on the economy and social welfare, private actors as a rule cannot. Public debt can usually be resolved in a more or less orderly fashion, private debt cannot. As big as public debt has gotten over the years, private debt is so much bigger.

    4. Oh, BTW:

      "The last time the United States issued war bonds was during World War II, when full employment collided with rationing, and war bonds were seen as a way to remove money from circulation as well as reduce inflation."

      And completely off-topic, but I think you will get a real kick out of this:

    5. One more, this time in relation to something also mentioned in PIketty's "Capital":

  19. Part 1

    I promised but I just couldn’t resist nor desist when you so insist……..hahahaahaha.

    Man, your argument that Capital income (of which interest is a component) is of minor importance compared to labour income when computing income and thus Gini aka inequality is a sure way to commit hara-kiri or seppuku whichever your pick.Here is a gem from Piketty, Saez and Atkinson (your favourite three stooges….er…..musketeers) to egt ur ceremony rolling (er....dont do actually do it,dude,ROFL)
    “Top incomes represent a small share of the population but a very significant share of total income and total taxes paid. Hence, aggregate economic growth per capita and Gini inequality indexes are sensitive to excluding or including top incomes”

    The reason? Capital Income has diminished in role is simply because it has been filtered out of the data. Hence what you get is a bias towards Labour Income which gives you the mistaken illusion that LI is the predominant component. This is not true at all.

    There are reams of data and studies that show LI plays an insignificant role in the income profile of the 1 percent who really matter in determining GINI oscillation.

    Ok read on…….
    Q 1 : Is capital income a vital point in determining inequality?

    Yes it is. Sez who? Emmanuel Saez and gang (you know the usual suspects) that is who, see above!!
    Where the heck again? Here:

    “Perhaps the most important aspect that affects the comparability of series over time within each country has been the erosion of capital income from the progressive income tax base. Early progressive income tax bases included a much larger fraction of capital income than most present progressive income tax systems. Indeed, over time, may sources of capital income, such as interest income or returns on pension funds,have been either taxed separately at flat rates or exempted and hence have disappeared from the tax base. Some early income tax systems (such as France from 1914 to 1964) also included inputed rents of homeowners in the tax base, but today inputed rents are typically excluded. As a result of this inputed rent exclusion and the development of numerous other forms of legally tax-exempt capital income, the share of capital income that is reportable on income tax returns, and hence included in the series presented has significantly decreased over time. To the extent that such excluded capital income accrues disproportionately to top income groups, this will lead to an underestimation of top income shares.

    Ideally, one would want to impute excluded capital income back to each income group. Because of lack of data, such an imputation is very difficult to fully carry out………………………………………

    We view this as one of the main shortcomings—probably the main shortcoming—of our data set. As we shall see in sections below, this limits the extent to which one can use our data set to rigorously test the theoretical economic mechanisms at play”

    Terjemahannya: Contemporary income data exclude or downplay capital income making it difficult to really assess the extent of inequality and by default actual Ci and LI compositions of Income, hence limiting the data’s capacity to test certain assumptions!!. .

    Also, long ago CI was captured but now it stays mostly hidden further limiting the scope to draw appropriate comparisons over the long run!!

    That admission by itself renders not only the data set but also your LI claims, at best iffy if not downright spurious or at worst as collapsible as a house of cards……hahahaha.

    Warrior 231

  20. Additionally, Q2 a): If missing capital income is not computed into the database, would that have an effect on the argument that Labour Income outweighs Capital Income ?

    Sure it does. It pulverises the flimsy argument that LI outweighs CI and thus CI is inconsequential with one crushing blow (Oh, one can imagine shades of Ali clobbering Foreman in Kinshahsa after all that early battering………hahahahaha……..Ali aka Warrior 231!! boomaye! boomaye!!).

    Here is another sucker punch again:

    “But top shares can materially affect overall inequality, as may be seen from the following calculation. If we treat the very top group as infinitesimal in numbers, but with a finite share S* of total income, then, graphically, the Lorenz curve reaches 1 − S* just below p = 100. As a result, the total Gini coefficient can be approximated by S* + (1 − S*)G, where G is the Gini coefficient for the population excluding the top group (Atkinson 2007b).

    This means that, if the Gini coefficient for the rest of the population is 40 percent, then a rise of 14 percentage points in the top share, as happened with the share of the top 1 percent in the United States from 1976 to 2006, causes a rise of 8.4 percentage points in the overall Gini. This is larger than the official Gini increase from 39.8 percent to 47.0 percent over the 1976–2006 period based on U.S. household income in the Current Population Survey (U.S. Census Bureau 2008, table A3).”

    Q2 b) : why is that so?

    Simply because underestimated CI distorts the Gini coefficient. Moreover, there is substantial evidence to show that CI accrued by the 0.01 percent of the top 1 has indeed a significant effect as shown by Saez et al here:

    “Using our preferred series INCLUDING CAPITAL GAINS, the increase in the Gini is 10.8 points i.e., more than twice as large as the 5.3 points recorded in the Gini (after correcting the 1992-93 discontinuity) and more than 3 times as large as the 3.2 points increase in the Gini for the bottom 99 percent. In other words, the top percentile plays a major role in the increase in the Gini over the last three decades and CPS data that do not measure top incomes fail to capture about half of this increase in overall inequality.”

    See!! It is a Big Deal mister especially when CI is factored into the equation. Because to put it simply, even Saez and co acknowledged that without getting the exact quantum of the capital component, Gini readings are often skewed substantially!!! and I am not talking about the next percentile groups in the top echelon yet!!

    And for further proof on the significance of the top 1 percent, see this:

    .“But it's important to note that for the rich, most of that income does not come from "working": in 2008, only 19% of the income reported by the 13,480 individuals or families making over $10 million came from wages and salaries. See Norris, 2010, for more details”

    See 81% of income for this superrich is from CI and NOT LI. And this applies more or less for the top 20 per cent as a whole as other data shows!!

    Thus, the net outcome of all this latest salvo of mine can be surmised as follows :

    a. the debt+ =Gini + assumption holds unless disproved by solid data. In simple English, income data is insufficient to test the assumption. Hidden CI counts simply because public debt implies transfer via the interest mechanism with the net beneficiaries being the top income earners across all countries.

    b. As long as economists fail to examine this nexus, they (Picketty and co included) will indeed be searching the woods for the trees…..but then again they have much to lose financially not to mention ideologically if they get to the trees dont they………hahahahahaha.

    P/s: Please dont do the harakiri and seppuku, dude (sob)...please dont...I was just kidding (hic!). Thanks for the time and putting up with my banter, mate.......Ciao!

    Warrior 231

    1. Wow, talk about being blind - and completely missing the forest for the trees.

      Here's what I wrote earlier:

      "For the top 1%, business income and dividends become much more important, but labour income is still a major factor."

      Piketty talks about a sea-change in the nature of inequality - from the rentiers of the 19th century, to the super managers of the present era, which could turn into the new rentiers of the 21st century.

      A couple of additional things here:

      1. You are conflating capital income (which is important for the top 1%) with interest income. But hidden or not, the biggest portion of capital income is still profits and dividends. Given my position, I know that better than most. I note, with some amusement, that the difference in the Gini estimates you quote is based on capital gains, not on interest income.

      2. What kind of idiot would go through the trouble of creating offshore tax vehicles only to invest in government bonds? Much of the increase in inequality over the past decade has been driven by profits and capital gains, not through interest income, which are gosh, at historical lows.

      Here's some further proof if you like (interest expense paid on US government debt, % GDP):

      2013 2.3%
      2012 2.1%
      2011 2.7%
      2010 2.6%
      2009 2.4%
      2008 2.9%
      2007 2.9%
      2006 2.9%
      2005 2.6%
      2004 2.5%
      2003 2.7%
      2002 2.9%
      2001 3.3%
      2000 3.5%
      1999 3.7%
      1998 4.0%
      1997 4.1%
      1996 4.1%
      1995 4.2%
      1994 3.9%
      1993 4.1%
      1992 4.3%
      1991 4.4%

      Same thing is happening in most countries - historically high debt is being matched by historically low interest expense. Exactly how can interest income be a major factor in capital incomes, when the actual interest paid by governments is declining relative to overall incomes? Hmmm? What's that? Can't hear you, dude.

      In other words, right back at you - where's the data backing up +public debt = +Gini? All the data, and speculation, regarding the increase in inequality focuses on capital gains, profits, and dividends, not interest, and especially not interest in public debt.

    2. Oh BTW,

      Source for interest expense from here, NGDP from here.

  21. Hahaha....dude, great sleight of hand again! I knew you were a crafty foxy one...

    a. when you put up those US. Interest figures, you forgot to state the actual quantum of the debt. For instance in 1991 it was 3 trillion , in 2013, it had boogied almost 6 times to 17 trillion!

    Using the figures you provided interest expense would be still 3 x more in 2013 despite rates being 50% down from 1991.

    For the actual figures from the horse's mouth go here:

    And you adroitly sidestep the cumulative gains in transfers over the period! Sly fella are you dude, must be the genes talking wink wink ROFLMAO

    Try fiddling around with the stuff on interest in Treasury Direct above, you will discover new fantastic facts and fancies as well

    b. In mentioning capital gains,there, Saez and co was already imputing interest income, come on man don't split hairs here, we all know what the chaps were implying.

    c. You seem a tad confused, dude. See Norris mentions only 19% of top percentile income was labour income but in your excerpted quote at the beginning of yer response, you still insist that " labour income is a major factor" . Come on kid, make up ur mind as to which choco u fancy....hahaha

    The fact remains that as debt grew the Gini grew. None of the data quoted thus far debunks that and interestingly private debt has been dragged into the equation as well but then again the impact of it has always been a given

    Warrior 231

  22. And just for the road, you also skipped this from my earlier excerpt of Saez, piketty et al:

    "Indeed, over time, many sources of capital income, such as interest income or returns on pension funds, have been either taxed separately at flat rates or
    fully exempted and, hence, have disappeared
    from the tax base."

    Why the silence on that dude? Cat got your tongue...come here naughty kitty, time for a smack......hahahaha. it is obvious from the above that Saez, Piketty et al do acknowledge their data sets have been compromised by missing CI (here to mean everything: dividends, interest etc NOT the narrow interpretation of Capital Gains sans interest you were alluding to........

    Another point:

    b."Finally, although the distinction between
    capital and labor income is clear conceptually,
    it is often partly blurred in the compositional
    tax statistics. For example, realized
    capital gains of business owners often correspond
    to the sale of accumulated earnings
    of entrepreneurs in their firm, rather than
    return on capital. Stock-option compensation
    sometimes appears as wage income but
    sometimes as capital income in tax statistics
    depending on the tax law."

    Translation; capital and wage income DO get mashed together,

    No, brother i dint miss the forest for the trees or vice versa. I just looked at the trees closer as I approached the forest.

    There is a leeriness with regard to +Debt=+Gini hypothesis that is perfectly understandable as it is with regard to the wealth tax.....ho hum...ROFL

    Warrior 231

    1. Warrior,

      Double wow. You're really grasping at straws now, aren't you? Are you sure you're looking at a forest, or a field of cannibis sativa?

      I don't know whether to keep trying to correct you or to allow you to keep your delusions.

      Well, one last time:

      You're confusing stock with flow. I hope you're not working with fluids or gasses man, because that flaw might be a little fatal in an engineer.

      Your main argument is based on the flow of interest income on public debt as a factor in increasing inequality. The reason why I quoted the interest expense numbers as a ratio to GDP is to show that this can't be true, since a falling ratio to national income must necessarily mean that the ratio of interest income from public debt in household income has to be falling as well, irrespective of who that income is going to.

      Since the economy itself has been growing, an absolute increase in interest expense doesn't tell you much, if at all, and neither does the increase in the public debt stock. In fact, the propensity of high income households to hide income in tax havens actually strengthens this argument, since this implies that national income (and national asset position) is actually understated.

      And before you get your britches in a twist, your last couple of points are pretty irrelevant. I'm quoting "pre-tax interest expense", not post-tax interest income flows to particular beneficiaries. To make it very clear, differential tax treatment doesn't matter in this case. It doesn't matter whether a particular class of beneficiary disappears from the tax roll, because that doesn't change the interest paid out one little jot.

      You can hide business income, capital gains and all sorts of other income streams through off-shore vehicles, but what the government actually pays in interest expense on public debt is on the record.

      In fact, I was pretty conservative here, because I took the gross figure - the net figure (i.e. interest paid to the public) is way lower. The difference between gross and net public debt stock in the US for 2013 is 28.8% of GDP or nearly US$5 trillion, and the interest expense is correspondingly lower - those figures come straight from the horse's mouth, too.

      By the same token, interest income on public debt cannot be much of a factor in non-labour income, because the income stream is so small relative to the economy.


    2. [cont]

      Since we're now playing with stocks rather than flows, how about this (source: Haver Analytics):

      1. Increase in S&P500 market capitalisation (1990-2013): 7.4x

      2. Increase in S&P500 total return over the same period (capital gains + dividends): 9.4x

      So what if the stock of public debt has increased six-fold? By my rough calculations, so has the absolute value of residential property (and that's taking into consideration the drop in prices after the Great Recession). There's no comparable statistics on commercial property, but I'd say it would be roughly the same, if not higher. The increase in the stock market on the other hand has been much bigger, and both absolute and relative returns from capital gains and dividends have substantially increased, unlike for public debt, which has seen relative returns decline.

      I've no idea how you got a three-fold increase in interest expense here, since the absolute figures show at best a doubling of interest expense, and a halving as a ratio to GDP. My 10 year old daughter's classmate is pretty good in math. Would you like me to ask him to help you with some tutoring?

      Even taking your three-fold estimate, that means income on capital gains and dividends from the stock market have increased three times more than interest income on public debt. Based on my estimates, it's at least four times greater than in 1990.

      As for capital income being embedded in labour income - so what? This amalgamation is wholly involved with capital gains and stock options, not interest income. Nobody gets an "interest income option" as part of their pay package. Selling a company doesn't involve a flow of interest income, much less interest income from public debt. This niggling point doesn't weaken my stand at all - interest income from public debt simply isn't a factor in raising inequality.

  23. Warrior,

    LOL, Ahhh, righ I see, in 2022, not 2013. And I was talking about the interest payment to GDP ratio, not the debt to GDP ratio...dude. I wonder what the S&P500 market cap will be in 2022, or nominal GDP for that matter. You sure you don't need to go back to school? Seems your awareness of time needs some revision work, too.

    As for finance taking over the top 10% - total employment in the finance sector (including tellers, insurance, and sales agents): 5.9 million out of a total (non-farm) workforce of 139 million, or just 4%.

    Securities work? 870k or 0.6%. I'm afraid lawyers, accountants, manufacturing CEOs, and yes, economics professors still have a presence in the top 10%.

    But hey, I understand your cognitive bias. You've got the glimmerings of the truth, but you're not quite there yet. Explaining why would take hours which I don't have, but keep at it, and you might get there eventually.

  24. @warrior,

    Running for time, so this will have to be very short:

    1. You haven't been following CBO forecasts very long, have you? You might want to check out what they said in 2000/2001:

    2. I don't disagree that finance incomes have been a major story with increasing US inequality. Just don't overdo it. Find a copy of Piketty's "Capital" (Kinokuniya sells it I believe), read the last two sections of Chapter 8 [pg 298 onwards] - "The Rise of Supersalaries" and "Cohabitation in the Upper Centile". Explains everything I think, including mixing of labour and capital incomes, as well as the proportion of finance wealth in the top 1%. It's grown, but by no means have hedge fund managers and fat cat bankers taken over the top 1%.

    3. All those snide comments on finance and banks etc etc - water off a duck's back bro. Given where I am now, the irony is delicious.

    4. Ramadhan Mubarak to you Warrior and your family. Stay safe and lay off the weed!!!!