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naraburns  nihil supernum  1yr ago (text post)   31649 thread views

Culture War Roundup for the week of December 5, 2022

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Long time motteizen, new pseudonym for extra privacy.

Some friends and I are launching a new anonymous group blog: https://www.theprotocols.net/ Many of us have interesting culture-war related takes that we post on forums like these, or on our group chats, but we felt like we needed a place to more permanently publish things that deserved a wider audience. Subscribe via ye olde email or RSS to see posts as they come out.

Our first post is "Regulated Banks Are Just Stealing Your Money Slowly". Here is the TLDR:

In the wake of yet another crypto scam blowing up, smug commenters are shaking their heads and saying: “This disaster is the consequence of jettisoning 100-years of regulatory progress. Traditional FDIC insured banks have never lost customer funds this way, not even in the 2008 crash.”

...Newsflash: FDIC insured banks are stealing your money. They do it very slowly, but the total amount is very significant.

Well, to be more accurate, it is the government stealing your money, not the banks. Actually, to be more accurate, it is impossible to pin down who exactly is stealing your money, because banks should be seen as arms of the state, and the state is the arm of an ecosystem of elites and elite clients, and the entire thing has grown fiendishly complex because it is in everyones interest to allow it to be complex. In fact, the real bandit may be your neighbor who bought a million dollar home with a 30-year, 2% interest rate loan. Or maybe the thief is your friend who cashed out on Apple stock after Apple funded a stock buyback with a loan at 1% interest. (Don’t go screaming at your friend – hate the game not the player).

Complaints about the “banks” or “guvmint” stealing money via inflation are very old and are often seen as the ravings of cranks – but I don’t think many people appreciate how bad the problem has become in the last two decades. Let us go through the numbers, courtesy of the St. Louis Fed. Well, to be more accurate, it is the government stealing your money, not the banks. Actually, to be more accurate, it is impossible to pin down who exactly is stealing your money, because banks should be seen as arms of the state, and the state is the arm of an ecosystem of elites and elite clients, and the entire thing has grown fiendishly complex because it is in everyones interest to allow it to be complex. In fact, the real bandit may be your neighbor who bought a million dollar home with a 30-year, 2% interest rate loan. Or maybe the thief is your friend who cashed out on Apple stock after Apple funded a stock buyback with a loan at 1% interest. (Don’t go screaming at your friend – hate the game not the player).

...We start with a simple yeoman saver who wants to exchange present labor for some sort of medium-of-saving...So he does the simplest thing: he puts his money in a 3-month certificate of deposit at his local regulated, FDIC insured, plain vanilla bank and continually rolls it over. No default risk, no interest rate risk.

If our yeoman made a deposit in 2002, according to Fed data, his account would have gained a total of 36% over the last twenty years thanks to the the interest paid out. But during that time the Consumer Price Index rose 68%! In 20 years, our yeoman would have lost 19% of his purchasing power! Actually it’s worse than that. The amount his money was diluted is actually more than CPI inflation, but since economic productivity increased, his effective purchasing power was not decreased by the full amount of the dilution....

The distinction between monetary dilution and CPI inflation is ignored in most college economic courses, but it is very important. Think of it this way: Imagine I buy a stock in a boring, stable company. A share of the stock happens to have the same price as ten 50” TVs. Over 20 years, the CEO and the board fraudulently and secretly dilute the stock by 50%, making my shares 50% less valuable. So if productivity had stayed constant, my shares would lose half their purchasing power, only being tradable for 5 TVs instead of 10. However, productivity did not stay constant, Chinese factory workers have made it 40% more efficient to buy TVs. Thus one share can now buy seven 50” TVs. My ability to turn my shares into the real good of a TV only decreased by 30%. Now given all this is it fair for the CEO to say, “hey, I only diluted you by 30%, not 50%!” Or, consider if TV factory productivity had doubled, and thus my purchasing power held constant, would it be fair for the CEO to say, “I didn’t steal from you at all, since you can still buy the same number of TVs with your share of stock.” No and no. The dilution is a completely separate issue from the price of tea (or TV’s) in China.

When we look at National Income change over the last 20 years, we see that our simple account owner lost 40% of his money. That’s not quite an FTX-level scam, but that is pretty serious theft.

We could also look at the performance of our yeoman saver’s bank deposits versus holding assets that are much harder to dilute – such as gold or silver. This shows us our depositor lost 50% to 60% of his savings. We could also compare against alternative investments, such as the S&P 500 ETF or real estate. Here is the full chart:

Purchasing-power-lost.png

No matter how you look at it, our yeoman saver has been jobbed. Even if he chooses a modestly longer duration for his store of value, such as a 3-year U.S. Treasury, our saver loses 12% relative to CPI and 35% relative to monetary dilution.

In order to simply stay in place, he must make a risky investment. Our saver could get a higher interest rate by purchasing a long-term bond. But that introduces large interest rate risks. Our depositor who bought a 30-year bond last year when interest rates were historically low would have just lost 30% of his money.

Now hopefully you see why we live in the golden age of asset bubbles. By default, if you put your money in the stodgy, regulated bank, you will lose your money via dilution. So everyone is looking for a place simply to stash their money that won’t get diluted. All the savings in the world sloshes around chasing some asset that can hold value. As any given asset becomes popular it shoots up in bubble, with the greedy and the scammers piling on too. Even the prudent investor cannot discern what asset is in a bubble, and what asset is properly priced. Is Silicon Valley real estate currently in a bubble? Or is it properly priced based on expectations in the next 20 years of lower interest rates and more monetary dilution? Is the stock market over-valued based on a long-term analysis of P/E ratio? Or is this the new normal based on a government that will inflate and lower interest rates in order to “make number go up”?

So here is our plea to any political influencer who thinks the answer to banking crises and crypto crises is just moar regulation: the number one priority should be ensuring the average person has a place where they can simply deposit their money and not have it diluted or inflated away. As long as the default state is to lose much of your money, people will be seeking a riskier, higher-yielding outlet – whether that be the type of money market accounts that crashed in 2008 or a “Nyan Cat” NFT....

To any reader who just wants to save for retirement – well, we don’t want to give financial advice because we would feel bad if we reverse our view next month and forget to tell you. And are you really going to trust a brand-new anonymous zine for investing tips? We can tell you that we here at Protocol have our own internal debates between bitcoin maximalists and those who believe in more diversification. Generally, we have our own net worth spread out among: short-term U.S. treasuries, dividend paying stocks, American and international equity index funds, gold, bitcoin, Urbit stars, our own startups, and our own homes. “Crypto” is bad, bitcoin is great, but do learn how to self-custody.

Myself (and the author of the post through this account) will be happy to answer any questions or respond to comments about this post.

Also, we are open to publishing guest blog posts if you have something you need to get off your chest and want to publish anonymously to the web. You can DM me here or email the contact address on the web site. Cheers!

EDIT: Looks like I did a really poor job of making a TLDR for the original post. I've added a bit more context, but I advise clicking through and reading the whole thing before leaving a comment.

This post is silly for several reasons.

At the broadest level, there's a question as to whether the government should target 0 inflation or not. Most mainstream economists agree that a small amount of inflation is good for a variety of reasons (incentive to invest, implicit cheaper cost of borrowing, relief valve for employers in lean times, etc.). I feel that reasonable people could disagree on these points, however, and there are some interesting points to be made for the overall net-benefits calculus of targeting a lower inflation rate. Certainly the recent inflation has been much higher than what anyone wants, which is why the Fed has been jacking up interest rates.

But instead of having that discussion, this post goes off in another direction. Firstly, the target of this article is simply wrong. Main street banks aren't stealing your money because they're not the ones causing inflation. The same loss of purchasing power would occur if you took your money and stuffed it under your mattress. It's the federal government's decision to target a positive nonzero inflation rate that's causing the issue, and that decision is no more of a "theft" of your money than simple taxation is. Some people might think the implicit tax of inflation is sneaky and therefore illegitimate, but there's nothing really secret about it.

The second, larger issue is that this post compares bank savings to gold, real estate, or the S&P 500 index. The problem is that these investments entail a significant amount of risk, so what's really being done here is an analysis of opportunity cost that the post tries to smuggle in as an argument towards the magnitude of supposed "theft". If you specifically want to save with inflation-protection as your main goal, there are investments specifically designed for that purpose. If you don't want to bother with something specialized for long-term savings like that, you can just put your money in a target date fund geared towards your retirement horizon and inflation shouldn't be an issue.

Finally, comparing inflation to the fraud (at least that's how I currently understand what happened) that happened with FTX is just goofy. The effects of inflation are known, and it's not hard to prevent erosion of purchasing power with minimal risk if that's your main goal. On the other hand, taking clients' money under pretenses that they couldn't discover without insider information like what FTX did is quite a different issue, and is something that regulation could indeed help with.

Firstly, the target of this article is simply wrong. Main street banks aren't stealing your money because they're not the ones causing inflation. The same loss of purchasing power would occur if you took your money and stuffed it under your mattress. It's the federal government's decision to target a positive nonzero inflation rate that's causing the issue, and that decision is no more of a "theft" of your money than simple taxation is.

The TLDR in my post cut out a more full explanation of this:

Well, to be more accurate, it is the government stealing your money, not the banks. Actually, to be more accurate, it is impossible to pin down who exactly is stealing your money, because banks should be seen as arms of the state, and the state is the arm of an ecosystem of elites and elite clients, and the entire thing has grown fiendishly complex because it is in everyones interest to allow it to be complex. In fact, the real bandit may be your neighbor who bought a million dollar home with a 30-year, 2% interest rate loan. Or maybe the thief is your friend who cashed out on Apple stock after Apple funded a stock buyback with a loan at 1% interest. (Don’t go screaming at your friend – hate the game not the player).

and that decision is no more of a "theft" of your money than simple taxation is. Some people might think the implicit tax of inflation is sneaky and therefore illegitimate, but there's nothing really secret about it.

Diluting the currency in the modern system is far, far, far less transparent in terms of how much dilution is occuring and who is getting it. It is far less transparent than taxation, and far less transparent than when a company board publicly votes new shares to be created to reward employees with bonuses.

The effects of inflation are known, and it's not hard to prevent erosion of purchasing power with minimal risk if that's your main goal.

"It's not a fraud because everyone knows it is a fraud and so avoids it." For a normie steel-worker retiring in 2013 it was not at all obvious that they needed to invest in the stock market simply to preserve purchasing power. The standard Vanguard retiree fund has lost out compared to inflation: https://investor.vanguard.com/investment-products/mutual-funds/profile/vasix#price

But actually it is really difficult to preserve purchasing power, because it requires buying extremely volatile assets and it is difficult to know if said assets are in a bubble or not. Consider the historically high P/E ratios we are experiencing -- are stocks still in a bubble or is this the new normal?

Your point about banks "stealing" seems more reasonable in context, as it seems you're casting the "stealing" label broadly which... I don't agree with, but I can see why you're doing from a writing standpoint. It's definitely worth summarizing more conscientiously, as not everyone will go read your entire post.

The point about inflation being bad because it's sneaky in some ways is understandable, but we live in a complicated world, and in the grand scheme of things inflation isn't that hard to understand. I can't speak for everyone, but I at least had a vague idea of what it was many years ago before I had any deep knowledge of economics. Any financial planner will be able to tell you about inflation quite easily if you ask. In a world where the legal system is impenetrable without the help of a lawyer, where medicine is impenetrable without the help of a specialized doctor, and where even taxes can be impenetrable without an accountant (or at least software like Turbotax), the sneakiness of inflation really isn't that bad. And the federal government isn't doing it because it's sneaky, at least for the most part. There are genuine arguments in favor of positive nonzero inflation that I detailed earlier.

The standard Vanguard retiree fund has lost out compared to inflation: https://investor.vanguard.com/investment-products/mutual-funds/profile/vasix#price

Firstly, this isn't a "standard retiree fund" as it's actually quite conservative, with ~80% of the assets being in bonds. Second, your math isn't right because it gives returns in an annualized format. A dollar invested from the start of the fund in 1994 to the present day would be worth about $4.50, whereas a dollar indexed to inflation from 1994 to today would only be worth about $2.00.

But actually it is really difficult to preserve purchasing power, because it requires buying extremely volatile assets

Again, if you just want to preserve your purchasing power while minimizing return/risk, TIPS are the exact opposite of "extremely volatile".

But instead of having that discussion, this post goes off in another direction. Firstly, the target of this article is simply wrong. Main street banks aren't stealing your money because they're not the ones causing inflation. The same loss of purchasing power would occur if you took your money and stuffed it under your mattress. It's the federal government's decision to target a positive nonzero inflation rate that's causing the issue, and that decision is no more of a "theft" of your money than simple taxation is. Some people might think the implicit tax of inflation is sneaky and therefore illegitimate, but there's nothing really secret about it.

I think a case can be made if banks are not paying full interest on deposits. For example, savings accounts yielding less than the federal funds rate.

The purpose of savings accounts is convenience in not having to store physical currency under your mattress. The selling point of savings accounts has never been returns or inflation protection or as a long-term retirement vehicle. If you want those things instead, then... go for a financial product that gives them.

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