On Capital

I spent the weekend reading Thomas Piketty and an interesting blog post by @Nemo_incognito. The Piketty popularity train is in full gear and Nemo's discussion of the topic was well worth the read. Krugman is doing all he can to pull the discussion into the smug left wing black hole that he loves.

For practitioners whose views are often tempered by the realities of markets and margin clerks - like us - the topic is still important. We see the Piketty Theory - That the wealthy (capital holders) will prosper because they can earn a return higher than the economic growth rate that constrains the rest - in a simpler way: The price level of the stock market tells you little about the economy despite the constant drilling of the connection. In times of Quantitative CB policy, the relationship becomes even more elastic (abstract).

what did the level of the Nasdaq say about the state of Tech in 1999? What does the recent new high in the S&P say about the soft 2% growth in the economy now? As we (and @IvantheK) have discussed before, monetary and tax policy is tilted to capital over labor. Abundance Economics supports the view that unlike other "products" the price of capital can increase while there is too much of it. The cost of capital is being held down. The monetization of debt has caused equity to take on "cash-like" characteristics. Pundits often say "Take profits, Raise cash, or Move to the sidelines" when the market is down. These actions apply to the "owner" of a cash substitute. How exactly does one "Move to the sidelines" with an actual Megaplex battery factory?

The next 20 years will shift the concept of Capital Ownership as the Boomers retire in greater numbers. The massive demographic "taking of the profits" will have to transfer to someone else. Piketty's solution of taxation underestimates the behavioral shift that would accompany this hand-off. I continue to advocate from the other side of the equation. The US economy MUST grow faster at both a real and nominal level. The social upheaval associated with inequality will bubble up in Russia and China long before the US.

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