Dean Baker: Are Investors Less Confused About Real and Nominal Interest Rates Than They Were 40 Years Ago?: "Brad DeLong picks up on Paul Krugman's column...
...and questions whether the top one percent of the income distribution (or top 0.01 percent) really have much to fear from higher inflation. Brad concludes that they don't, but that they think they do. He says:
The top 0.01% were impoverished by the 1970s as a whole. But they have not been enriched by the post 2008 era. What they have gained via a higher capitalization via low safe interest rates has been offset by what they have lost as a result of depressed profits, depressed by a low level of economic activity, a depression which has not been completely offset by downward pressure on wages. The top 0.01% would not be poorer absolutely (although they would be poorer relatively) in a high-pressure higher-inflation economy. But they think they would be…"
I'm not sure about Brad's story here.
While weak GDP growth has undoubtedly depressed profits, this has been largely offset by a large increase in profit shares. If I were a 0.01 percenter, I would certainly not be confident that a return to something resembling full employment would not depress profits. In other words, a loss in profit share due to higher wage pressures could certainly offset the gains due to increased output. Also, from the standpoint of the rich, why risk it?
The other factor that could carry much weight in the minds of the super-rich is the impact of inflation on the stock market. Brad notes the plunge in stock valuations in the 1970s as one of the items that reduced the wealth of the rich:
a steep fall in stock market equities even though the value of corporate debt owed falls, as investors become much more pessimistic and value earnings at a much lower multiple–in part because of the productivity growth slowdown, in part because of confusion between nominal and real discount rates, and for other reasons.
It is remarkable that more than three decades later we don't have a widely accepted explanation for the extraordinarily low price to earnings ratios of the 1970s. The view that investors were confused and wrongly discounted earnings using nominal interest rates rather than real interest rates is one common explanation.
However, if this was true in the 1970s do we have good reason to believe that it would not be true today? After all, these are the same folks that could not see an $8 trillion housing bubble in the last decade and a $10 trillion stock bubble in the prior decade. When do we think the big investors stopped being wrong on fundamental economic issues?
If you are capital--rather than an overleveraged trader--what you are interested in is not temporary fluctuations in valuation ratios but rather the productive assets you own and the profits they reap. From capital's perspective, a bear market is a fire sale on valuable properties: an opportunity for you to pick up good stuff cheap. A rise in inflation expropriates debtholders' claims on your equity and makes you richer. And the possibility that the dumb money in the market may not distinguish properly between nominal and real rates of return and so offer to sell things to you at a good price makes you even richer still.
Fifty years ago the National Association of Manufacturers and the AFL-CIO both understood that they had a strong material interest in a high-pressure economy. Now the AFL-CIO is dead as a political force in swing districts, and exerts no pressure either on the mass national press, the median member of congress, or (via the median member of congress) on the Federal Reserve. But what happened to the NAM?