Pur Autre Vie

I'm not wrong, I'm just an asshole

Thursday, July 31, 2014

Rentier? I Hardly Know Her!

In my previous post I wrote about what a "rentier" is - someone who owns property that is useful and scarce, and therefore earns income from it (which is called "rent," even if it does not literally take the form of money paid by a tenant).  Now I'm going to mangle the concept slightly, in service of a broader point.

I'm going to describe two socially useful things that you can do.  One thing you can do is write insurance policies - that is, you can agree to bear a specified amount of risk in exchange for a specified amount of money (the insurance premium).  This can be beneficial because it involves mutually beneficial exchange - one person, who can stand to bear a lot of risk, relieves a less risk-tolerant person of risk at some price that both parties find attractive.  (There are also cases in which risks cancel out, so that by shifting them to the same person they are eliminated.)  And you don't literally have to write an insurance policy in order to engage in this kind of transaction.  Broadly, any time one person is compensated by another person for bearing risk, he is performing an insurance function.

Another socially useful thing you can do is defer consumption, thereby making your money available for someone else to use today, in exchange for a larger amount of money in the future.  Again, the idea here is to facilitate mutually beneficial transactions, in which people who want to consume at different times can negotiate a price (in this case, a rate of interest) that each finds attractive.

Now in reality you can't loan money without shifting some risk from one person to another.  And more broadly, almost any financial transaction involves both a risk component and a financing component.  If I buy a share of stock, I am both incurring the risk that the issuer of the stock will do poorly and foregoing current consumption in the amount of the purchase price of the stock.  And my return on the stock will be a blend of compensation for these two services I am performing.  Different securities (or more broadly, different financial products) have different blends of the two.  And of course, there are a lot of different kinds of risk - if you buy a Treasury security, you don't bear much credit risk, but you bear inflation risk, interest rate risk, and so on.

Okay, so now we come to the euthanasia of the rentier.  The concept here is that financial capital is not, at our present moment, and maybe for a long time, actually scarce.  This doesn't mean that holders of securities should get no returns.  After all, holders of financial assets are bearing risk, and should be compensated for it.  But there should be very little compensation, if any, for foregoing current consumption.  After all, as we've discussed, policymakers are trying to increase current consumption, so as to bring the economy toward full employment.  If possible, we should actually push interest rates negative (which, in real terms, they are), so that there is actually a negative return to foregoing current consumption.  (The confusion here, at least for me, is that financial capital is not "land" in the traditional sense.  But the concept is so congruent that I think the term makes sense.  Again, we are basically talking about the returns to property-owning, as opposed to the returns to working.  The "foregoing-current-consumption" role is basically the role of a rentier, in this analogy.)

And so we have yet another way to understand the asset boom/bubble.  Returns on financial assets (really, assets of all kinds) are very low because there is no reason to compensate the rentiers.  We are still willing to compensate risk-bearers, but when you strip out the returns from consumption-deferring, the returns on financial assets drop quite a bit.  Historical averages for stock market returns, etc. are no longer to be expected.

So our current situation is natural, in a way, although it is unsettling and has potentially grave implications for young people who are just starting to save.  But as Krugman observed, in the post I linked to above, we are going to get a lot of whining from the rentiers, who are being denied the compensation they think they deserve.


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