Google and tech’s elite are living in a parallel universe | John Naughton | Comment is free | The Guardian.
An important read, but I disagree with the premise that the digital revolution is causing inequality. It might be contributing, but nowhere to the degree that monetary policy is. Interest rates are near zero and have been since the financial crisis.
Since Volker resigned as chairman of The Fed, U.S. central bankers have flood the U.S. financial system with cheap money. This in turn floods the world economy with cheap money. This is because the U.S. is essentially the central banker to the world.
Those of you that argue that Nixon killing Bretton Woods ended this are incorrect. Greenspan, and then Bernanke, flooded the U.S. financial system with money via low interest rates and printing money (Quantitative Easing), and/or bailouts.
The banks borrow the money at 1% and lend it at 5% or more, making huge profits. The money goes into whatever the latest craze is- Internet stocks (crash), housing (crash), and now housing (yes, again), technology (yes, again), and government debt (the big worry now). The banks lend the money to tech companies and venture capitalists, prospective home owners, and the government, and, the invest the money themselves.
Financial stocks go up far beyond what the financial companies are contributing to the economy. The market is flooded with cheap money. The money gets invested into many ill conceived business models. The banks move subprime loans off their balance sheets so they don’t care if it defaults. Venture capitalists and senior managers with stock sell the stock and make ridiculous money. Those that don’t- so what- money is cheap. The banks can always get more money from the government whether it be through low interest rates or bailouts. This is the equivalent of giving a detoxing heroin addict more heroin to alleviate the symptoms and calling the addict cured because s/he doesn’t have anymore symptoms.
When asset prices outstrip their value, it’s called Asset Inflation. It’s also called a Bull Market. We are addicted to hyper growth that outpaces the value of the assets we produce. We should be aiming for moderate growth that keeps pace with the value of what we produce.
Cheap money steers profits to banks and the owners of capital to an extreme. (I don’t have a problem with owners of capital make more than laborers, as long as it’s reasonable, e.g., not outstripping the value that they actually create, because the owners of capital risk their assets, without which laborers would not have jobs.) It’s the Fed that promotes this. It is not the digital revolution. The concentration of wealth into the hands of tech companies and venture capitalists is not the cause of inequality, it’s just anther example of it. Cheap money is the cause. This is essentially welfare for banks and venture capitalists.
The real bubble is the government debt bubble. Instead of lending money to banks, we should raise interest rates and use our money to improve infrastructure and the quality of our workforce. We already can’t produce enough skilled workers. Pretty soon we won’t even be able to produce people intelligent enough to use the technology the few clever developers who could afford to go to Stanford can create.
Here endeth the rant.