#9 The Asset Inflation Ponzi

Asset inflation is a ponzi scheme that concentrates wealth and exacerbates income inequality. Hear me out here.

Productive entrepreneurship has long been a calculable measure of opportunity cost relative to the discount rate and the replacement value of assets. As Faustman so brilliantly displayed with his forestry rotation formula…

Here we can see that the discount rate (which under a free market is determined by capital accumulation via saving) directly impacts the opportunity cost on the replacement value of assets. However, the last century has led to an unprecedented disruption in this very important market phenomenon.

As credit rates are kept artificially low by central banks, the replacement value of assets is kept higher than the replacement cost of capital. Cheap money and cheap credit encourage the hoarding of assets which are bid up at the margin by those looking to protect their wealth from inflation. This creates a feedback loop in which those with assets enrich themselves over long periods of time, and those who enter the inflation scheme later, as opposed to earlier in its creation, face a staunch disadvantage for wealth accumulation.

To see some examples of how this asset inflation impacts and exacerbates the wealth gap between generations look no further than the thread linked at the beginning of this post which highlights the disparity between milennials and boomers.

These types of wealth concentrations are destabilizing to a society over the long term, as we can see from Dalio’s chart above often coincides with the rise of populism, something we are witnessing in full stride today in 2020. We also know that expansionary monetary policy sends false profit signals to businesses. Leading to what Mises called “capital consumption”, whereby business owners falsely equate business capital with profits, by miscalculating operating margins based on artificial economic signals. This breeds even more malinvestment in an already unstable system, and leads to a world where central banks must take increasingly drastic measures to keep the expansionary bubble inflated.

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe…” -Ludwig von Mises


Book of the Month:

The Dao of Capital: Austrian Investing in a Distorted World

“Blaming wild market volatility on the “animal spirits” of the herd mentality takes the focus off where it belongs: on the actions of the government. Instead of functioning as instruments of information, signaling to entrepreneurs how and when best to serve consumers, interest rates are perpetually manipulated by central bank actions to the point of meaninglessness. Artificial changes in interest rates become a deceptive feint by which entrepreneurs succumb to malinvestment, because they believe there are more resources (i.e., savings) in the system than there really are. Monetary policy insidiously plays with our time preferences and our very ability to engage in economic calculation. The greater the distortion, the greater destruction needed to correct it.”

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