Hard money is not a mistake

Paul Krugman is wondering hard about why fear of inflation so haunts the wealthy and well-off. Like many people on the Keynes-o-monetarist side of the economic punditry, he is puzzled. After all, aren’t “rentiers” — wealthy debt holders — often also equity holders? Why doesn’t their interest in the equity appreciation that might come with a booming economy override the losses they might experience from their debt positions? Surely a genuinely rising tide would lift all boats?

As Krugman points out, there is nothing very new in fear of inflation by the rich. The rich almost always and almost everywhere are in favor of “hard money”. When William Jennings Bryan worried, in 1896, about “crucify[ing] mankind on a cross of gold”, he was not channeling the concerns of the wealthy, who quickly mobilized more cash (as a fraction of GDP) to destroy his candidacy for President than has been mobilized in any campaign before or since. (Read Sam Pizzigati.)

Krugman tentatively concludes that “it…looks like a form of false consciousness on the part of elite.” I wish that were so, but it isn’t. Let’s talk through the issue both in very general and in very specific terms.

First, in general terms. “Wealth” represents nothing more or less than bundles of social and legal claims derived from events in the past. You have money in a bank account, you have deeds to a property, you have shares in a firm, you have a secure job that yields a perpetuity. If you are “wealthy”, you hold a set of claims that confers unusual ability to command the purchase of goods and services, to enjoy high social status and secure that for your children, and to insure your lifestyle against uncertainties that might threaten your comforts, habits, and plans. All of that is a signal which emanates from the past into the present. If you are wealthy, today you need to do very little to secure your meat and pleasures. You need only allow an echo from history to be heard, and perhaps to fade just a little bit.

Unexpected inflation is noise in the signal by which past events command present capacity. Depending on the events that provoke or accompany the inflation, any given rich person, even the wealthy “in aggregate”, may not be harmed. Suppose that an oil shock leads to an inflation in prices. Lots of already wealthy “oil men” might be made fabulously wealthier by that event, while people with claims on debt and other sorts of equity may lose out. Among “the rich”, there would be winners and losers. If oil men represent a particularly large share of the people we would call wealthy (as they actually did from the end of World War II until the 1960s, again see Pizzigati), gains to oil men might more then offset losses to other wealthy claimants, leaving “the rich” better off. So, yay inflation?! No. The rich as a class never have and never will support “inflation” generically, although they routinely support means of limiting supply of goods on whose production they have disproportionate claims. (Doctors and lawyers assiduously support the licensing of their professions and other means of restricting supply and competition.) “Inflation” in a Keynesian or monetarist context means doing things that unsettle the value of past claims and that enhance the value of claims on new and future goods and services. Almost by definition, the status of the past’s “winners” — the wealthy — is made uncertain by this. That is not to say that all or even most will lose: if the economy booms, some of the past’s winners will win again in the present, and be made even better off than before, perhaps even in relative terms. But they will have to play again. It will become insufficient to merely rest upon their laurels. Holding claims on “safe” money or debt will be insufficient. Should they hedge inflation risks in real estate, or in grain? Should they try to pick the sectors that will boom as unemployed resources are sucked into production? Will holding the S&P 500 keep them whole and then some, and over what timeframe (after all, the rich are often old). Can all “the elite” jump into the stock market, or any other putative inflation hedge or boom industry, and still get prices good enough to vouchsafe a positive real return? Who might lose the game of musical chairs?

Even if you are sure — and be honest my Keynesian and monetarist friends, we are none of us sure — that your “soft money” policy will yield higher real production in aggregate than a hard money stagnation, you will be putting comfortable incumbents into jeopardy they otherwise need not face. Some of that higher return will be distributed to groups of people who are, under the present stability, hungry and eager to work, and there is no guarantee that the gain to the wealthy from excess aggregate return will be greater than the loss derived from a broader sharing of the pie. “Full employment” means ungrateful job receivers have the capacity to make demands that could blunt equity returns. And even if that doesn’t happen, even if the rich do get richer in aggregate, there will be winners and losers among them, each wealthy individual will face risks they otherwise need not have faced. Regression to the mean is a bitch. You have managed to put yourself in the 99.9th percentile, once. If you are forced to play again in anything close to a fair contest, the odds are stacked against your repeating the trick. It is always good advice in a casino to walk away with ones winnings rather than double down and play again. “The rich” as a political aggregate is smart enough to understand this.

As a class, “the rich” are conservative. That is, they wish to maintain the orderings of the past that secure their present comfort. A general inflation is corrosive of past orderings, for better and for worse, with winners and losers. Even if in aggregate “we are all” made better off under some softer-money policy, the scale and certainty of that better-offedness has to be quite large to overcome the perfectly understandable risk-aversion among the well-enfranchised humans we call “the rich”.

More specifically, I think it is worth thinking about two very different groups of people, the extremely wealthy and the moderately affluent. By “extremely wealthy”, I mean people who have fully endowed their own and their living progeny’s foreseeable lifetime consumption at the level of comfort to which they are accustomed, with substantial wealth to spare beyond that. By “moderately affluent”, I mean people at or near retirement who have endowed their own future lifetime consumption but without a great deal to spare, people who face some real risk of “outliving their money” and being forced to live without amenities to which they are accustomed, or to default on expectations that feel like obligations to family or community. Both of these groups are, I think, quite allergic to inflation, but for somewhat different reasons.

It’s obvious why the moderately affluent hate inflation. (I’ve written about this here.) They rationally prefer to tilt towards debt, rather than equity, in their financial portfolios, because they will need to convert their assets into liquid purchasing power over a relatively short time frame. Even people who buy the “stocks for the long run” thesis (socially corrosive, because our political system increasingly bends over to render it true) prefer not to hold wealth they’ll need in short order as wildly fluctuating stocks, especially when they have barely funded their foreseeable expenditures. To the moderately affluent, trading a risk of inflation for promises of a better stock market is a crappy bargain. They can hold debt and face the risk it will be devalued, or they can shift to stocks and bear the risk that ordinary fluctuations destroy their financial security before the market finds nirvana. Quite reasonably, affluent near-retirees prefer a world in which the purchasing power of accumulated assets is reliable over their planning horizon to one that forces them to accept risk they cannot afford to bear in exchange for eventual returns they may not themselves enjoy.

To the extremely rich, wealth is primarily about status and insurance, both of which are functions of relative rather than absolute distributions. The lifestyles of the extremely wealthy are put at risk primarily by events that might cause resources they wish to utilize to become rationed by price, such that they will have to bid against other extremely affluent people in order to retain their claim. These risks affect the moderately affluent even more than the extremely wealthy — San Francisco apartments are like lifeboats on a libertarian titanic. But the moderately affluent have a great deal to worry about. For the extremely wealthy, these are the most salient risks, even though they are tail risks. The marginal value of their dollar is primarily about managing these risks. To the extremely wealthy, a booming economy offers little upside unless they are positioned to claim a disproportionate piece of it. The combination of a great stock market and risky-in-real-terms debt means, at best, everyone can all hold their places by holding equities. More realistically, rankings will be randomized, as early equity-buyers outperform those who shift later from debt. Even more troubling, in a boom new competitors will emerge from the bottom 99.99% of the current wealth distribution, reducing incumbents’ rankings. There’s downside and little upside to soft money policy. Of course, individual wealthy people might prefer a booming economy for idealistic reasons, accepting a small cost in personal security to help their fellow citizens. And a case can be made that technological change represents an upside even the wealthiest can enjoy, and that stimulating aggregate demand (and so risking inflation) is the best way to get that. But those are speculative, second order, reasons why the extremely wealthy might endorse soft money. As a class, their first order concern is keeping their place and forestalling new entrants in an already zero-sum competition for rank. It is unsurprising that they prefer hard money.

Krugman cites Kevin Drum and coins the term “septaphobia” to describe the conjecture that elite anti-inflation bias is like an emotional cringe from the trauma of 1970s. That’s bass-ackwards. Elites love the 1970s. Prior to the 1970s, during panics and depressions, soft money had an overt, populist constituency. The money the rich spent in 1896 to defeat William Jennings Bryan would not have been spent if his ideas lacked a following. As a polity we knew, back then, that hard money was the creed of wealthy creditors, that soft money in a depression was dangerous medicine, but a medicine whose costs and risks tilted up the income distribution and whose benefits tilted towards the middle and bottom. The “misery” of the 1970s has been trumpeted by elites ever since, a warning and a bogeyman to the rest of us. The 1970s are trotted out to persuade those who disproportionately bear the burdens of an underperforming or debt-reliant economy that There Is No Alternative, nothing can be done, you wouldn’t want to a return to the 1970s, would you? In fact (as Krugman points out), in aggregate terms the 1970s were a high growth decade, rivaled only by the 1990s over the last half century. The 1970s were unsurprisingly underwhelming on a productivity basis for demographic reasons. With relatively fixed capital and technology, the labor force had to absorb a huge influx as the baby boomers came of age at the same time as women joined the workforce en masse. The economy successfully absorbed those workers, while meeting that generation’s (much higher than current) expectations that a young worker should be able to afford her own place, a car, and perhaps even work her way through college or start a family, all without accumulating debt. A great deal of redistribution — in real terms — from creditors and older workers to younger workers was washed through the great inflation of the 1970s, relative to a counterfactual that tolerated higher unemployment among that era’s restive youth. (See Karl Smith’s take on Arthur Burns.) The 1970s were painful, to creditors and investors sure, but also to the majority of incumbent workers who, if they were not sheltered by a powerful union, suffered real wage declines. But that “misery” helped finance the employment of new entrants. There was a benefit to trade off against the cost, a benefit that was probably worth the price, even though the price was high.

The economics profession, as it is wont to do (or has been until very recently), ignored demographics, and the elite consensus that emerged about the 1970s was allowed to discredit a lot of very creditable macroeconomic ideas. Ever since, the notion that the inflation of the 1970s was “painful for everyone” has been used as a cudgel by elites to argue that the preference of the wealthy (both the extremely rich and the moderately affluent) for hard money is in fact a common interest, no need for class warfare, Mr. Bryan, because we are all on the same side now. “Divine coincidence” always proves that in a capitalist society, God loves the rich.

Soft money types — I’ve heard the sentiment from Scott Sumner, Brad DeLong, Kevin Drum, and now Paul Krugman — really want to see the bias towards hard money and fiscal austerity as some kind of mistake. I wish that were true. It just isn’t. Aggregate wealth is held by risk averse individuals who don’t individually experience aggregate outcomes. Prospective outcomes have to be extremely good and nearly certain to offset the insecurity soft money policy induces among individuals at the top of the distribution, people who have much more to lose than they are likely to gain. It’s not because they’re bad people. Diminishing marginal utility, habit formation and reference group comparison, the zero-sum quality of insurance against systematic risk, and the tendency of regression towards the mean, all make soft money a bad bet for the wealthy even when it is a good bet for the broader public and the macroeconomy.

Update History:

  • 1-Sep-2014, 9:05 p.m. PDT: “the creed of the wealthy creditors”; “among the quite well-enfranchised humans we call ‘the rich’.”; “for hard money are is in fact a common interest”; “Unexpected inflation is noise in the signal that by which”; “money wealth they’ll need to spend in short order in as“; “before the market finds its nirvana”; “individuals towards at the top of the distribution”; “and/or or to default” (the original was more precise but too awkward); removed superfluous apostrophes from “Doctors’ and lawyers’”.
  • 6-Sep-2014, 9:50 p.m. PDT: “The marginal value of their dollar is primarily about managing them these risks“; “whose costs and risks tilted up the income distribution but and whose benefits”

67 Responses to “Hard money is not a mistake”

  1. Michael Byrnes writes:


    In addition to the “extremely wealthy” and the “moderately affluent”, you could perhaps add large corporations. They have more to lose than to gain from a dynamic economy. I could see them supporting tight money for the same reasons that a Walmart might support a minimum wage hike – bad for them, worse for their competion, so ultimately good for them.

    Your description of wealth was exactly right – claims on future production and nothing more. I think the bottom line is that everyone (or most everyone) wants to rest on their laurels (assuming they have laurels to rest on). But an economy never rests, so life is a treadmill rather than a race. There are no guarantees on what one’s real assets will be worth in the future, ergo it is better to hold one’s wealth in a class of assets that are insured – financial claims.

    Though it doesn’t exactly apply here, I am reminded of my favorite quote from War and Peace:

    “The Bible legend tells us that the absence of labor – idleness – was a condition of the first man’s blessedness before the Fall. Fallen man has retained a love of idleness, but the curse weighs on the race not only because we have to seek our bread in the sweat of our brows, but because our moral nature is such that we cannot be both idle and at ease. An inner voice tells us we are in the wrong if we are idle. If man could find a state in which he felt that though idle he was fulfilling his duty, he would have found one of the conditions of man’s primitive blessedness. And such a state of obligatory and irreproachable idleness is the lot of a whole class – the military. The chief attraction of military service has consisted and will consist in this compulsory and irreproachable idleness.”

    Instead of the military and idleness, we have people wanting to do earn their wealth, “cash out”, and thenceforth be insured against loss – in a way that can only be guaranteed through artificial means.

  2. We are living in such a dark time. One the one hand, we have these tight money hawks. We have pundits and arm chair theorists from all ends of the spectrum in constant worry of the next “bubble”. And, where I would hope that we would have intelligent and thoughtful commentary, instead we get these ugly rhetorical hit pieces. This post is not aesthetically different than something you’d see in an old newsletter warning about the “Rothschilds” controlling the Fed and manipulation of the gold market. At least those screeds, ignorant as they are, occasionally attempt empirical backing.

    As a rule, I would suggest that referring to a group as “the ____” and as “they”, assuming they have a collective set of opinions, and that they are sociopathically self interested, with a conveniently vague and always negative characterization is probably not a rhetorical product becoming of the better part of your nature.

    You post a lot of challenging, great stuff here. Please step out of the manure. There’s probably a great post in here, but only if you give it a hell of a good scrub down.

    eg: ““Full employment” means ungrateful job receivers have the capacity to make demands that could blunt equity returns.”
    First, nice implication there with the “ungrateful job receiver” stuff. Your newsletter should sell well at next weekend’s gun show. But, besides that, please show us empirically where a full employment economy has ever blunted equity returns.

    You are SO much better than this. You really are.

  3. “Unexpected inflation is noise in the signal by which past events command present capacity.”

    Could be some kind of heavy risk aversion from people with supermoney, like $100 million plus, who just want some kind of really safe 2-3% real, and don’t care if that hurts their chances of the 7% real the stock market has offered, approximately, on average historically (see Siegel’s Stocks for the Long Run).

    It would be interesting if there were some kind of data on the portfolios of old money versus new money, with maybe the old money really wanting to protect their dynasty and born into wealth, and the new money more like, now I have $100 million from nothing, I’ll risk the stock market, what’s the worst that can happen, I go to $30 million, and over the very long run the risk of a major loss, very little (again Siegel)? $30 million, anyway, is still a dream coming from nothing.

  4. “Can all “the elite” jump into the stock market, or any other putative inflation hedge or boom industry, and still get prices good enough to vouchsafe a positive real return?”

    I think with stocks the long run supply curve of corporate projects that yield about 7% real may be really long and flat, so a shift out in demand, even a big one, might not hurt returns much over the long run. It’s my supply side explanation of the equity premium puzzle, based on the flexibility of stock money allowing for better long run projects for a corporation than debt money does. For a brief explanation see:


  5. “Even if you are sure — and be honest my Keynesian and monetarist friends, we are none of us sure — that your “soft money” policy will yield higher real production in aggregate than a hard money stagnation, you will be putting comfortable incumbents into jeopardy they otherwise need not face.”

    Not so sure this is really true. Hard money is bringing right now near zero real returns on TIPS and long term T-bonds. That just might not be enough that your princly heirs don’t deplete the fortune to zero pretty quickly.

    But they’re also pushing for the government to jack up real interest rates.

  6. […] at 3:17 on September 2, 2014 by Mark Thoma Hard money is not a mistake – interfluidity Inflation, Septaphobia, and the Shock Doctrine – Paul Krugman Back to College, the Only […]

  7. “As a class, their first order concern is keeping their place and forestalling new entrants in an already zero-sum competition for rank. It is unsurprising that they prefer hard money.”

    True, a booming stock market often makes these upstarts richer, or much richer, than they are with their old money. You now see the riff-raf with nicer yachts and beach houses than the old money. Scary to the blue bloods.

  8. Ok, in comment 5, not really hard money, but not nearly soft enough.

  9. I don’t know if there’s any way to get information on the portfolios of the old and new rich. Perhaps you could anonymously survey their investment managers.

  10. “As a class, their first order concern is keeping their place and forestalling new entrants in an already zero-sum competition for rank. It is unsurprising that they prefer hard money.”



    But yeah, you might see how the heirs in charge of the dynasty money see how a booming and risky stock market keeps them only cautiously invested, yet makes these riff-raf a lot richer than they are, driving around in more expensive cars, and yachts, and pricing the top hotel rooms out of their reach, making them feel like commoners.

  11. bakho writes:

    Spot on.
    I would add that the wealthy like cheap labor.
    The wealthy don’t like full employment because the margins of the labor pool are more difficult to manage.
    -jonny bakho

  12. Dan Kervick writes:

    This all seems pretty much right to me. The more wealth someone possesses, the greater the relative importance that person attaches to holding onto existing wealth vs. accumulating new wealth. That just seems like human nature. Support for putting the old wealth at risk for the sake of a dream of more-than-offsetting accumulation of new wealth is going to have to be a sure-thing prospect to overcome the risk-aversion of those whose chief aim in life is to hold onto what they have.

    Think about more traditional agrarian societies. It was certainly possible to argue in such societies, and correctly, that a redistributive land reform could unleash the productive energies of the society and lead to much higher aggregate annual income, and even to higher levels of aggregate wealth accumulation. But have the land-holding elite, in any time and place, ever supported the redistributive transfer of their land? I doubt it. They don’t care about whether “society” grows richer, but only about whether they grow richer personally. For similar reasons, trying to convice creditors to transfer substantial portions of their wealth to debtors on the theory that it will all pay off in the end for them is an unlikely political gambit. In any case, if they do support this transfer as a one time thing, they are not likely to support it via the mechanism of inflation, since they know that once a government develops a taste for the latter, they might continually resort to it.

    The very wealthy will alwasy come down on the side of stability, property rights, and preserving the preserving the integrity of existing claims and social power relations. They are not the chief constituency for growth-oriented creative destruction. While such policies can indeed generate a lot of new wealth, most of that wealth accrues to rising, entrepreneurial, aspirant New Men, not to old money.

    Also if inflation causes many people to attempt move out of assets whose values are based on cash flows from debtors into ownership shares of business enterprises, then the value of existing ownership shares is diluted as the capital stock of enterpreises is distributed more widely among the capital-owning class. Thus the appreciation in aggregate share value per share-holder has to be very substantial to offset the dilution.

  13. dan writes:

    So the rich aren’t rational?

    This is all interesting speculation but on what basis should anyone accept the conclusion?

    Who are the rich in any case?

    And why isn’t a classic paradox of composition a simpler and thus equal or better explanation?

    The ‘rich’ is not defined. However, each individual rich person is; and we know in economics that there is a common situation where what is rational action for each individual actor in sum is not rational.

    the paradox explanation also benefits because it works as an explanation in any point in the inflation/deflation cycle.

    Or, the rich aren’t different, they just have more money – everyone gets more conservative at points in the business cycle – the rich and poor alike. that is what a business cycle is. everyone getting conservative (rationally for them) at a point in the business cycle where they perceive risks rising.

    While your explanation has to go off on a wild tangent to explain why sometimes the ‘rich’ get their deflationary bias, and sometimes they don’t.

    I do think your point that part of the aim is relative wealth rather than absolute wealth – consistent with lots of research in behavioral economics – does muddle the clean rational agent actors actions just as you say.

    I think grand theorizing about ‘the rich’ is all bunk – until you define ‘they’.

    and not to mention – why are the rich so different in the southern European countries which favor inflation from the rich in Germany who don’t?

  14. Peter K. writes:

    @2 Erdmann

    As Dorothy Parker wrote “If you want to know what God thinks of money, just look at the people he gave it to.”

    “But, besides that, please show us empirically where a full employment economy has ever blunted equity returns.”

    The hated 1970s? Greenspan did give us near full employment in the late 1990s but then we got the Tech Stock and housing bubbles.

  15. Nick Rowe writes:

    “Almost by definition, the status of the past’s “winners” — the wealthy — is made uncertain by this.”

    It is not inflation that creates uncertainty, but changes in the rate of inflation. Those who dislike uncertainty would be equally against lowering inflation and raising inflation. They would want to keep inflation at exactly the same rate it has been in the past.

  16. JP Koning writes:

    “Why doesn’t their interest in the equity appreciation that might come with a booming economy override the losses they might experience from their debt positions? Surely a genuinely rising tide would lift all boats?”

    Steve, I’m not sure that there’s any ‘false consciousness’ or contradiction here.

    Stocks are actually a bad hedge against inflation, thanks to the interaction between historical cost accounting and tax rules (click my name if you’re interested). If the rich are both large bond and equity owners, inflation hits them in both pockets.

  17. gbgasser writes:

    Hard Money isn’t a mistake per se but it is a contradiction and physical impossibility which relies on zero sum thinking.

    Nicks comment about “want to keep inflation at exactly the same rate it has been in the past” is a clear demonstration of that. Wanting to keep anything at the same rate as it has been in the past is a fools errand. The gall of central bankers thinking they have the right or the ability to keep things just as they are is staggering. The error in all this is in thinking that whatever they have earned or stolen in the past is theirs forever.

    Just because your money will buy 10% of the worlds oil today doesn’t mean you are entitled to 10% of the worlds oil forever. The hard money types see a dwindling share of the pie (even if the pie is growing in size) as inflation…..period.

    As the world grows and more and more people want access to the real goods, unless the production of real goods grows at the same rate as financial returns there will be what we call inflation. Knowing this thinking that anyones financial portfolio deserves 7-10% returns forever is insane. We cannot increase the real goods production by 7% in perpetuity.

    Their wishes and demands can’t be met.

    Screw ‘em Other people got to survive on this planet too

  18. Jeff writes:

    Yes “they” are bad people. They are abusing money and power, by using it only in service of making (or retaining) more money and power. Too much free time to manipulate the political, financial, and communications systems I guess. While the rest of us only have time to get in a blog post or two edgewise. Too busy just trying to survive on “their” scraps.

    It can’t go on, of course. No one’s hourly time is worth 1000 times more than any other working person. (Or infinite times more in the case of the non-working rich living on the gains and interest only.) The ladder they’re trying to pull up after themselves does not come from the water but from steerage; we’re all on the same boat. Eventually the unsustainable will not be sustained — revolution, again.

  19. […] In a post yesterday, Krugman refers to my suggestion that it's mostly a case of septaphobia, or fear of the 70s. The idea here is that inflation really did run out of control in the 70s, and it really did take a massive recession engineered by Paul Volcker to rein it in. If that was one of your seminal experiences of the consequences of loose money, then it's no surprise that you fear inflation. But Steve Randy Waldman says this is "bass-ackwards": […]

  20. […] Why rich guys (abnormally) fear higher inflation.  (Interfluidity) […]

  21. Vladimir writes:

    Many seniors who would fall in most people’s definition of middle class fear inflation because their private sector pension plans do not have a COLA adjustment and second, they may live in a jurisdiction where property taxes are adjusted according to market value. Given that their home may be paid off, while inflation means a rise in their nominal wealth – no benefit from reducing the relative burden of debt- it may also mean a rise in their living expenses due to higher property taxes at the same time that they may be seeing little growth or even a decline in their annual income. Older folk are thus the most adverse to inflation and they also tend to have a higher net worth. Finally if their wasn’t a general, well established suspicion of paper money would their still be a gold market?

  22. Tim Young writes:

    Followed across from the link at FT Alphaville.

    I am afraid that you have wasted your time writing this. The rich / elite do not fear inflation. Most of the calls for longer / more QE are coming from financial market types, who do well out of inflated asset prices and active trade in risky financial products with relatively large transactions costs, politicians in power who would be glad to see their real debt problem recede, and establishment economic commentators and professors with sufficient property and stock wealth not to feel personally disadvantaged by inflation.

    Krugman is an instinctive inflationist, so he plays fast and loose with the information on asset holdings by wealth to suggest that, since the wealthy own a lot of nominal assets, they are rentiers, undeserving of our sympathy. A more careful analysis of this information, however, suggests that it is the poorest savers (naturally the really poor have little or no assets), without the sophistication or the spare money to hold illiquid assets, who tend to make nominal assets such as bank accounts the mainstay of their savings, and these are the people, including the elderly and children, who would get hit worst by inflation. The elderly typically tend to be more conservative, so it should not be surprising that marginal conservative politicians tend to be more vociferous about the dangers of inflation.

  23. Peter K. writes:


    Older folks are also basically the Fox News demo, and Fox has been screaming about Obama and the Fed’s inflation that will happen any day now. Also see the Wall Street Journal and CNBC, which Krugman points to. Grandma is basically being manipulated. Ironically the inflation hysteria may have helped the Fed keep inflation expectations up even though actual demand isn’t that great given austerity and the trade deficit.


  24. Peter K. writes:

    @ 22 I think you’re just flat out wrong. I suspect you’re coming from an Austrian perspective, those who don’t care about employment and wage levels at all and would rather have a depression than a bubble.

    The Bank of International Settlements – the “banker’s bank” – is basically the financial sector’s voice on this and they always want to raise rates and change rationales to do explain why we should. Some of the smarter economists at the banks like Hatzius at Goldman Sach, know their macro and are more rational and reality based. They realize a little inflation would be good for everyone, but they are overriden by the powerful elite who Waldman and Krugman discuss.

  25. Vince Cate writes:

    What Krugman does not understand is the non-linear nature of inflation when a government that prints its own money gets to high levels of debt and deficit relative to GNP. Things can suddently flip from normal inflation to high inflation. I can explain how this happens:


  26. Lord writes:

    The rich don’t see inflation as having any benefit. It is only an inconvenience and noise. It is the claim of growth that is significant, but they don’t particularly need growth, but preservation of their wealth and growth and risk offset each other. If they made their money it was through risk, if they kept it, it was through limiting it. If they are young and believe they can do it again, the gain will be appealing, say Elon Musk. If older and doubtful or a heir, the risk will outweigh the gain, say Steve Forbes.

  27. gbgasser writes:

    Hey Vincent

    Where is that hyperinflation in Japan you were so sure would be here by “Early 2014 at the latest”? I haven’t forgotten your prediction from last year when Abenomics was being instituted.

    When are you going to drop that hyperinflation hobby horse? Obviously hyperinflations do not generate in the manner you think they do.

  28. spider09 writes:

    This is an excellent article.

    One other thing I would note — and that very much comports with what you have written — is that much of the thought processes you lay out for the moderately affluent and extremely wealthy aren’t even conscious. And I think I know where they come from.

    Having spent a good bit of time with some folks that would be deemed “extremely wealthy” (ie, in the over $1bn net worth set), I’ve come to the conclusion that not only — like you say — do the extremely wealthy not want to roll the dice all over again and see where they end up, but they also see the chance of having to roll those dice as much more likely than it actually is.

    And I think that’s because we humans are just simply programmed to overstate in our own heads the likelihood of the risks that can hurt us most.

    So to someone with a couple billion dollars, losing 30% of their net worth tomorrow isn’t truly going to hurt their lives in any meaningful way (other than pride, etc). BUT if the armageddon comes — hyperinflation, runs on banks, water issues, civil unrest, etc — even the extremely wealthy are vulnerable and can be harmed in a meaningful way.

    You couple we humans’ tendency to overstate the likelihood of risks that can hurt us most and couple that with some good old fashioned confirmation bias of what an extremely wealthy person sees in the news, and it looks to them like those armageddon events are much more likely than they actually are, which in turn leads the extremely wealthy to fight vociferously against any policy that even comes close to edging that way.

  29. […] In a post yesterday, Krugman refers to my suggestion that it’s mostly a case of septaphobia, or fear of the 70s. The idea here is that inflation really did run out of control in the 70s, and it really did take a massive recession engineered by Paul Volcker to rein it in. If that was one of your seminal experiences of the consequences of loose money, then it’s no surprise that you fear inflation. But Steve Randy Waldman says this is “bass-ackwards”: […]

  30. Old Strings writes:

    Great post.

    One point hits me as a bit counter-intuitive. You assert: “the rich” are conservative (in a risk-taking sense). But how can that be? Didn’t the billionaires of today get that way by taking huge risks? You say they don’t want to roll the dice again; aren’t they dice players at heart? Do you think the defining feature of their personalities changes when they hit 70? Maybe.

    So I don’t know that I buy that the rich are risk-averse. Nevertheless, your point that they can’t all win in an inflationary environment is key here. The rich in America are risk-takers, which means they are people who have pursued a non-diversified financial strategy. Buffet liked to own only three stocks, Soros bet the farm on market turning points, Oprah re-invested all her winnings in Oprah, Jay Leno has put much of his wealth into antique cars. Rich business-owners tend to heavily invest in their own businesses. Because they are inveterate risk-takers, the rich have trouble diversifying their portfolios. They fear inflation not because they are conservative, but because they are highly specialized gamblers and, for many, playing the financial markets isn’t their game. While a Buffet or Soros might salivate at the notion of positioning themselves strategically in an inflationary environment — or at least find hedging it interesting, the owner of a ship-building company, or a CEO whose wealth is predominantly invested in his own company, or a partner in a law firm… probably doesn’t want to think about hedging against inflation. Many of the rich are heavily invested in industries that could be hurt by inflation. They don’t hedge, not because they aren’t risk takers, but because they are.

  31. Jeff writes:

    @30, excellent points about risk/diversification.

    @28, Thanks for the first-hand insights into some of the possible psychology at work. Per my previous comment though, the risk of civil unrest arises precisely from the actions (pulling up the ladder) of these same uber-wealthy. They create some of the very risks they most fear. Similar for water “issues” in the case of titans in control of any industries. (Also telling is how you slipped into the minimizing verbiage of the wealthy there with “issues”, around a subject and a substance that is absolutely critical for life and health of every human being, and whose scarcity and poor quality is a particular issue for the poor.)

  32. […] Steve Randy Waldman has a long, thoughtful take on my speculations about the hard-money preferences of the wealthy. Basically I confessed myself somewhat confused: I get why creditors should hate inflation, but aggressive monetary responses to the Lesser Depression have been good for asset prices, and hence for the wealthy. Why, then, the vociferous protests? […]

  33. […] Steve Waldman has a new post up on why rich people, and not so rich people, might prefer hard money over greater wealth. This post was a response to Paul Krugman, and Cullen adds some good thoughts too. […]

  34. Vincent Cate writes:

    Hey gbgasser,
    I can now explain how it is like an earthquake, landslide, volcanoe, forest fire, avalanche, and other things. The conditions for a chain reaction build up over a long time and then in a short time the chain reaction happens. It is very hard for any of these things to say when the chain reaction will exactly start. The best that we can really do is tell that the conditions for the chain reaction are there so there is a “high risk”. So while my guess on the timing was wrong, the theory of what will happen is even stronger now.


  35. Lord writes:

    There is one group that abhors inflation. Most business people and misers instinctively are vulgar Austrians and actually seek gain without risk or at least loss avoidance and for them deflation is attractive largely because they are more focused on wealth preservation than future income. They like the status quo and don’t want to see change that is far more likely to impair than help them. They are generally older, have experienced gains and losses, for whom the attraction of risk has diminished. These are often your moderately affluent which far outnumber the truly wealthy.

  36. gbgasser writes:

    Old Strings @30

    I take some issue with the notion that the rich are risk takers. At least when it coms to risking their OWN money. Most of the risks taken by these guys won’t affect them personally very much if the bet goes bad. The downside ends up being paid by the workers losing jobs. There is a dynamic these days it seems where its always someone else’s money that is being used and if it pays off big they keep most of it and if it loses they foist the losses on others.

    Now certainly there are some true risk takers out there, Elon Musk is probably an example, Richard Branson too but I think they are the exceptions that may prove my point.

  37. Mike Sproul writes:

    You say almost nothing about the cause of inflation. If the money-issuer’s assets keep pace with its issuance of money, then money will be adequately backed and inflation will be avoided. If the issuer freely issues $100 to anyone offering $100 worth of assets in exchange, then the money supply will respond to the needs of business and recession will be avoided. The various “hard money” proposals (100% gold standard, 100% reserves for private banks, etc,) will at least assure adequate assets to back what little money is issued (thus avoiding inflation), but they will also restrict the elasticity of the money supply, and thus cause recession.

  38. Steve Roth writes:

    Would love to hear your thoughts on this:


    You’ve heard this rant from me before.

    If you think of two entities — the rich and the poor — and [the poor] owes money to [the rich], isn’t it obvious why the rich — the creditors — hate inflation?

  39. Vince Cate writes:

    It is not as simple as the poor owe money to the rich, there is more to it. The rich borrow at really low interest rates from money made out of thin air by the Fed to speculate in the markets and make a fortune. The poor see their retirement money earning 0.2% interest and don’t have enough to live on.

  40. It’s amazing how people across the political spectrum manage to simultaneously believe that low interest rates are a boon to “Wall Street” and a bane to “savers”. Vince #39 has managed to twist himself into believing that “the rich” are net borrowers and “the poor” are net lenders. And, shock of shocks, we manage to come to a conclusion that the system is rigged by “the rich”.

    I say we throw them in the lake, and if they sink, it means they’re innocent. It’s the only way to know.

  41. Tim Young writes:

    There are many stupid comments here, but that by Steve Roth takes the prize. I would imagine that the vast majority of wealth is represented by productive capacity of some type – above all, land. For example, Britain’s richest person is the Duke of Westminster, who owns large chunks of central London. The really, really rich might hold a little money as income from their holdings passes through their possession before being reinvested in those holdings, but that money will be a tiny proportion of their wealth. So, Steve your characterisation of society as comprising rich creditors and poor debtors is so unrealistic as to be ridiculous. The really, really rich can be expected to be more of less indifferent to inflation (they might benefit from the effect of engineering inflation on asset prices and be worried by the economic turmoil that realised inflation might involve), but you can bet that they much prefer inflation as a means of, say reducing the public debt burden, to taxes on income, or heaven help them, wealth!

  42. […] Big Money Wants Hard Money—But Why?  Econospeak (Krugman v. Waldman). […]

  43. Barry writes:

    One thing to keep in mind is that the rich don’t get austerity – we do. Wall Street got bailed out quite nicely. Currently the megacorps are pulling in record profits.

    They are not in our economy.

  44. zanon writes:

    simpler krugman:
    - Republicans are bad!
    - Democrats are good!
    - We should take money from Republicans and give it to Democrats
    - Republicans who resist this are bad (but I repeat myself)
    - People who do not see this are morons!

    simpler SRW:
    - What krugman say!

  45. Old Strings writes:

    @Tim Young, your bad form encourages me to reply in bad form.

    Nobody here really knows who the rich are but it’s very rich that you use some UK landlord as your representative rich dude. In America the current generation of rich aren’t country squires or Princes but believe it or not, self-made business owners. Business owners tend to be heavily invested in their own business/industry and not well-diversified and don’t own a lot of land in London.

    Your snotty attitude may work well in your own social circles, but I think we’d rather hear some arguments with some thought & evidence behind them rather than some irrelevant story abkut how the richest bloke in London might be representative of the rich in America.

  46. Old Strings writes:

    As a generalization, of course Steve Roth is right. On the whole, poorer people tend to be debtors and richer people creditors. How is that not self-evident?

  47. Old Strings writes:

    Maybe a better way to put it: on the whole, people who are more conservative with their finances tend to be creditors, whereas people who are more liberal with their finances tend to be debtors. I suspect that translates, on net, to the more conservative ending up wealthier and the more liberal winding up poorer. However, the richest get rich by using leverage, borrowing a lot and risking a lot. That wouldn’t mean that they’d prefer inflation if they’ve already gambled big and won big.

  48. Old Strings writes:

    Inflation by definition is an increase in the general price level, but when inflation really takes off prices don’t tend to increase at the exact same time. (Nick Rowe’s point is key: it’s unexpected inflation that people fear.) If I’m McDonald’s, I’d fear unexpected inflation because the price of beef might rise before my customers’ pay checks. Now maybe McDonald’s would benefit from the price of beef rising due to being a cheaper substitute in the hamburger market, but if I were McDonald’s I wouldn’t want to take that risk.

    Look at periods of inflation and how commodity prices move if you doubt that prices moving at different points in time doesn’t wreak havoc on some industries (and the wealthy people heavily invested in them).

  49. Steve Roth writes:

    @Time Young: “I would imagine that…”

    An apt locution.

    If you’re interested in things that you aren’t just imagining (here for the US), you could check this:


    You’ll find all the data for it here:


    You can find an explanation here:


    And if you’re interested in knowing how those assets are distributed (by income and net-worth quintiles), you can find the information here:


  50. Steve Roth writes:

    @Old Strings:

    Thanks for jumping in. But I would characterize things somewhat differently than you do:

    “on the whole, people who are more conservative with their finances tend to be creditors”

    Understand that of the current American total household net worth (wealth), approximately 60% was inherited.

    If you unconservatively spend your income instead of conservatively not spending (saving) it, it just means your wealth is now held by someone else. Total quantity is unchanged by that (directly).

    Neither personal saving nor not-saving increases the total stock of wealth/”savings.”

    In fact, not saving (spending) spurs production, which produces surplus, which the financial system converts into wealth.

    So spending, not saving, increases wealth.

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  52. Tim Young writes:

    Sorry Steve, on reflection I should have written “naïve” rather than “stupid”.

    Your mistake seems to be like the mercantilist mistake. You are thinking in terms of financial assets, rather than in economic terms. Most wealth is not financial, and only some of financial wealth is structured as debt contracts that define creditors and debtors.

    I would argue that, ultimately, US wealth is the value of the US capital stock. If you reckon that GDP is the return on this capital stock, and conservatively assume a real rate of return of 10%, you can estimate the size of the US capital stock at about $150tn. The stock of US debt assets is a minority of that number. According to SIFMA, the total size of the US bond market is about $40tn. US broad money stock is about $11tn. The point is that nominal assets are small in relation to the stock of real assets. The nominal assets would have to be highly concentrated in the hands of “the rich” before they would lose from loose monetary policy.

    And I think that it is actually more likely that it is the poorer savers who hold a greater proportion of the wealth in nominal assets, especially bank accounts, and it is this which matters to who gains and loses from loose monetary policy and (potentially) inflation. Those statistics on asset distribution are just the ones that Krugman uses to mislead. They show that “the rich” own much larger holdings of nominal assets. Of course they do; they’re rich – they have much larger holdings of most assets! Unfortunately, non-financial assets are missing from those statistics, but my guess, eg from looking at the type of people in “rich lists”, is that the rich actually hold a much greater proportion of their assets in real forms (especially non-financial real assets like land, buildings and private company equity stakes etc).

    One reason for my irritability on this point, and I why I chose the Duke of Westminster as an example, is that I am actually a member of the left of centre UK Green Party, and I have struggled to make this point before. The left tends to be obsessed with money and income, and overlooks the 500 pound gorilla of real assets. While they are beating “bankers”, they are missing more discreet people who are orders of magnitude richer and whose wealth may be derived more from their ancestors than their own efforts. As I find it hard to believe that Krugman is a fool, I suspect that his attitude to inflation, and that of many other similarly comfortably-wealthy metropolitan establishment types including professors and economic commentators, is conditioned by the fact that much of their wealth is held in the form of housing, equities and pension benefits, and they are detached from the pain of low real returns on nominal assets.

    And, by the way, although I know less about land holding in the US, this story may be of interest: http://nypost.com/2013/01/06/a-load-of-crop/

  53. Felipe Voloch writes:

    Interesting discussion but doesn’t necessarily agree with the facts. Look at Brazil in 1980′s and early 90′s, where the wealthy were the ones most favored by hyperinflation. All debts and obligations were “indexed” (i.e. rates were inflation plus real rate). Poor people were reduced to stock up on non-perishable items as soon as they were paid, while the rich had access to indexed bank accounts and foreign currency. Maybe you should examine the hidden assumptions of your model.

  54. Steve Roth writes:

    @Tim Young:

    Measuring is generally better than musing.

    Your estimate of total US assets (cash + bonds + equities + real estate) is only off by about 35%. Not bad — actually about $110 trillion.


    This the market’s current best guess at the total value of the capital stock.

    Real estate is about a 33% of that total (down from 51% in the early 80s).


    “The stock of US debt assets is a minority of that number.”

    About 37%, actually — more than real estate:


    But as I’m sure you know, stock and bond ownership is much more concentrated at the top, while real-estate ownership is much more widely distributed.

    So rich people’s portfolio allocation to real estate is well below 33%.

    But stock ownership is really the key here. The top 20% owns basically all the corporate equity.

    Notably, they own the banks.

    And the huge bulk of household debt is to banks — mortgages, consumer debt, student loans.

    When the top 10/20% owes money to banks, they owe it to themselves. From that entity’s perspective, inflation/deflation has no capitalized value effect on those debts/credits.

    But the bottom 80% or 90% of households owe somewhere north of ten trillion of dollars to the top 10 or 20% of hiouseholds.

    Higher inflation means they will pay off those loans in less-valuable dollars. Capitalize those repayments in NPV terms, and the top-percentile creditors lose $100 billion in real buying power per year for every extra percent of inflation. ($10 trillion/100.) Instantly and permanently, without a single account transfer occurring.

    This is just arithmetic. The rich are smart enough to do the arithmetic.

  55. Ben Feddersen writes:

    Fantastic insight here. I would just add that those elites whose fortunes are tied to equity rather than debt ARE beginning to make a bit of a fuss. For example, here in Germany the mainstream media has been all aflutter about record lows in interest rates, at the local Sparkasse for example, and while it’s couched in traditionally moral/populist terms (Oma is losing her nest egg! Saving is no longer worthwhile!), narratives so prevalent aren’t usually driven from below. It’s possible that the equity and the debt elites will soon come into direct conflict. This is all not to say I’m optimistic, but the future is by no means fixed by the trajectory of the present.

  56. […] take on the whole thing) Why midterm elections matter to you: Our view Feast of the Wingnuts Hard money is not a mistake Bulletproof Neoliberalism It’s harder to reach the American dream if you’re reaching all alone […]

  57. Tim Young writes:

    There is more to capital stock, let alone wealth, than just those items, Steve. For example, I doubt that “equity” in your sum includes non-traded equity in your own company, which will amount for much of the wealth of many of the richest people (eg the tech entrepreneurs who have not yet brought their company to market). Also, where are items like, vehicles, art, precious metals etc?

    Actually, I don’t know that the wealthy tend to own a higher concentration of their wealth in bonds; that is your assertion. What is your evidence? I would have thought most bonds are held by financial intermediaries and funds – ie mainly by the middling rich, not the plutocrats. And when you think about it, there is a good reason why the really rich hold a comparatively small proportion of their wealth in simple nominal assets like bonds and bank accounts – that is that, when your fortune is that big, you can pay for specialists to help you with more complex investments.

  58. JKH writes:

    Steve Roth,

    “But stock ownership is really the key here. The top 20% owns basically all the corporate equity. Notably, they own the banks. And the huge bulk of household debt is to banks — mortgages, consumer debt, student loans. When the top 10/20% owes money to banks, they owe it to themselves. From that entity’s perspective, inflation/deflation has no capitalized value effect on those debts/credits. But the bottom 80% or 90% of households owe somewhere north of ten trillion of dollars to the top 10 or 20% of hiouseholds. Higher inflation means they will pay off those loans in less-valuable dollars. Capitalize those repayments in NPV terms, and the top-percentile creditors lose $100 billion in real buying power per year for every extra percent of inflation. ($10 trillion/100.) Instantly and permanently, without a single account transfer occurring. This is just arithmetic. The rich are smart enough to do the arithmetic.”

    Hi Steve.

    I’m not sure they’re quite that smart.

    As in – I’m not sure your analysis is quite correct.

    The bank equity ownership of the rich is a lot less in nominal dollars than the bank lending portfolio in aggregate. Therefore, the ownership is not directly exposed to the full nominal depreciation of that lending portfolio. It is the capitalist slice of those depreciated dollars that is their exposure – not the aggregate from which the slice is extracted.

    That analysis needs to include the full liability structure of the banking system in order to see who ends up with what in terms of the exposure you are interested in. That liability structure includes deposits, debt, and equity.

    For example, I doubt you would be comfortable in suggesting same ownership concentration in deposits that you posit for equity ownership.

    But I don’t the answer to that myself.



  59. Steve Roth writes:

    @JKH: “But I don’t the answer to that myself.”

    Well gosh darn it all to hell, if you don’t, who in the hell does?

    Cheers backatcha,


  60. Steve Roth writes:


    Isolating one component that bank shareholders can be sure of, in a sea of complex and uncertain effects.

    Imagine a bank (owned by shareholders, all in the top 20%) that owns a bunch of 30-year fixed-rate loans (borrowed by 80%ers) that won’t expire for 15 years. No ongoing lending by the bank. It just holds these loans and collects interest.

    All interest is paid at the end of the year.

    The banks’ interest revenues on those loans this year were $1 billion. Expenses were $100 million. $900 million in profit, all distributed as dividends.

    Inflation over the next year (and ensuing) is 1%/year.

    The bank again makes $900 million in profits, and distributes it to shareholders.

    But the 80%er borrowers only pay $891 million in real buying power, and the 20%er shareholders only receive $891 million.

    The next year, $882 million in buying power. Etc.

    There are many other complicated effects at work, but it’s hard for me to think that this basic arithmetic mechanism on the existing stock of fixed-rate loans could be less than massive.

  61. […] Krugman [1, 2] and Steve Randy Waldman are having an interesting exchange on why the wealthy support tighter monetary policy despite the […]

  62. JKH writes:

    Steve R.,

    Nice example.

    Quick and dirty response:

    I think the first thing to do is to infer a reasonable real world case balance sheet from the data in your example.

    So let’s say the interest rate on the loans is 5 per cent, which is probably generous in today’s environment.

    So assets are $ 20 billion by inference.

    Then suppose the equity capital is 10 per cent of assets, which is indeed very generous in the real world capital environment.

    That means equity capital is $ 2 billion and deposits (generalizing the liability structure) are $ 18 billion.

    So you’ve structured a sort of 15 year annuity of profits that are depreciating in real terms over time – to the tune of a compound annual rate of 1 per cent on an original value of $ 900 million. And as you say that effect considered on its own constitutes a massive transfer of real wealth from equity investors to borrowers – at the margin – in respect of income and expense respectively.

    But what it omits is the similar transfer of real wealth from depositors to borrowers on the larger principal value of the portfolio.

    So my point is that the transfer of wealth that is occurring in respect of the $ 18 billion principal value dominates the transfer of wealth that occurs over time on the interest paid on that $ 18 billion. Especially since the interest paid is staggered over time whereas the $ 18 billion is fully exposed starting on day one.

    Suppose you had one equity shareholder and one depositor. The question then is how the burden of inflation is distributed to these two stakeholders and what the relative burden of the equity shareholder is of the total.

    I’m not sure what the calculation should be but the point is that there is some sharing. And then the question is about who the depositors actually are – compared to who the shareholders actually are.

  63. […] Krugman and Steve Waldman having been puzzling of late about why inflation is so viscerally opposed by the dreaded one […]

  64. […] peerless Interfluidity sees things differently: the very rich are not concerned […]

  65. […] 60 years in business journalism  (Columbia Journalism Review) • Hard money is not a mistake (Interfluidity) • Instant Gratification: As the economy gets ever better at satisfying our immediate, […]

  66. […] 60 years in business journalism  (Columbia Journalism Review) • Hard money is not a mistake (Interfluidity) • Instant Gratification: As the economy gets ever better at satisfying our immediate, […]

  67. Vivian Darkbloom writes:


    “Stocks are actually a bad hedge against inflation…”

    Warren Buffett would have agreed with you back in 1977 (for mostly different reasons). Not sure if he holds the same view today: