Do the “rentiers” actually gain from deflation?

I don’t know the precise definition of this (French?) term, but I’d like to use Paul Krugman’s definition, as I’ll be commenting on his post:

Financial securities are overwhelmingly held by the rich “” more than 60 percent by just one percent of the population, more than 98 percent by the top 10 percent. It’s true that middle-class Americans own significant shares of deposits, and that some part of their pension accounts would be in bonds. On the other hand, middle-class Americans owe the lion’s share of debt; relatively speaking, the wealthy have hardly any.

So if you think about the distributional consequences of the choice between a Japan-style lost decade of very low or negative inflation and a Mankiw-Rogoff strategy of higher inflation for a while, it’s very much about benefits to the wealthy versus benefits to the middle class. Since I’ve been arguing that some inflation would help the economy recover, what we’re seeing in practice is that defending the interests of a small wealthy slice of the population takes priority over a possible recovery strategy.

If ‘rentiers’ means government bond holders, then rentiers obviously benefit from deflation in the US (although perhaps not in Greece or Argentina, where default is possible.)  But Krugman is clearly looking at a broader class, those that hold financial assets.  Unless I’m mistaken the Fed policy that reduced NGDP in 2009 at the fastest pace since 1938 also tended to sharply reduce the value of most financial assets.  Stocks fell dramatically, as did many riskier forms of debt.  Commercial real estate also plummeted in value.

Monetary policy is not a zero sum game.  I favor monetary stimulus because I think it’s good for the country, not because I’ll benefit.  But as a matter of fact I do think I would benefit, despite that fact that I am a bit of a rentier myself (not that my income is what the NYT would consider “lucrative,” but I’m a very high saver.)  Indeed I think poor, middle class, and rich Americans would all benefits from monetary stimulus, just as all three classes were hurt by the crashes of 2008-09 and 1929-33.

PS.  I just noticed that Matt Yglesias made the same mistake.  Remember that stocks rallied in both 1933 and 2010 on news of monetary stimulus.  Corporate America wants monetary stimulus.


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19 Responses to “Do the “rentiers” actually gain from deflation?”

  1. Gravatar of Morgan Warstler Morgan Warstler
    6. July 2011 at 07:51

    DeKrugman’s chart is a PERFECT, and I mean PERFECT visual proof of my argument with progressives based on standard bi-polar theory of politics.

    You have right there the B power (the top 1%), the A power (the next 9%), and the C power (the bottom 90%).

    This is set in 2007, when the C power (the Democrats) has been siding for to long with the B power, giving them a larger piece of the pie than the next 9%. I’m sure it has only gotten worse since.

    As such, the ONLY REAL strategy for the C power is to focus all its efforts on promoting the A power back into its natural place at the top.

    The only economic question we face right now is what is the best tax policy, regulatory policy, labor policy, etc. FOR THE A POWER.

    What policies will hurt the top 1% and give it all to the next 9%?

    Said another way, all our problems occurred when Dems decided that they could get along better by sucking off the top 1%, rather than letting the big fish in small ponds (SMB owners) lord it over them.

    The A power, the next 9%, OWN and RUN this country, they constitute the both the $ and the votes – because far more than 9% spend their time in that group.

    The are the Tea Party. They are the real rentiers that DeKrugman hates… they are the guys with ready cash in every small town ready to swoop in and buy up 12M houses when the big bank / Fortune 1000 oligarchs are frogged marched into into rightful smaller piece of the pie that the B power is supposed to have.

  2. Gravatar of redonkulus476 redonkulus476
    6. July 2011 at 08:12

    Here I respond to Yglesias as well: https://www.themoneyillusion.com/?p=9709

    Great post, Scott!

  3. Gravatar of Scott N Scott N
    6. July 2011 at 08:14

    Scott, you and all the other econbloggers need to get some Google+ and facebook like buttons on your posts. It is an easy way for us to share them with people we know.

  4. Gravatar of Benjamin Cole Benjamin Cole
    6. July 2011 at 08:25

    Yes, another excellent post by Sumner. Krugman made a point, but managed to wave the class flag unnecessarily as well.

    If the US is ever invaded by a military force, it is true that the poor might die in the US infantry more than other classes. Should we not go to war, even as foreign troops landed on our soil?

  5. Gravatar of ssumner ssumner
    6. July 2011 at 10:22

    Morgan, Off topic, but interesting.

    redonkulus, I think you posted the wrong link. Can you try again?

    Scott N. I’ll look into it.

    Benjamin, Good analogy.

  6. Gravatar of Master of None Master of None
    6. July 2011 at 10:27

    The principal opponents of further monetary policy expansion are inflation hawks, and the only people who should be terrified of inflation are people with defined benefit plans and/or fixed income investors (“rentiers”).

    I believe Krugman’s view (which I share) is that it is the rentiers that have a financial interest in maintaining negative/near-zero short-term interest rates (i.e. a steep yield curve) and ~0% inflation, as that maximizes the real present value of bond-like securities while minimizing reinvestment risk.

    I don’t think he was arguing that crisis-like deflation is preferred by bond-holders.

  7. Gravatar of Master of None Master of None
    6. July 2011 at 10:30

    Welcome back, by the way.

  8. Gravatar of shocking shocking
    6. July 2011 at 11:37

    Hey Prof. Sumner,

    I think the problem is twofold. First, when we look at the current situation savers find themselves in, they don’t understand the consequences of monetary expansion. Yes, although it will raise inflationary expectations, assuming positive growth ensues, it will also result in a rise in nominal interest rates, which should more than compensate for the income eroded by inflation.

    The same is true for savings accounts. In this video with Brad Delong, you see a prominent Wall Street analyst arguing for the interests of those earning next to nothing on their deposits, trying to protect them from inflation. But as you’ve taught me, this fear is misguided and of harmful consequences for the general economy. Krugman’s point is much the same, but he draws a distinction between the political classes and their economic interests.

  9. Gravatar of Contemplationist Contemplationist
    6. July 2011 at 14:18

    Master of None

    If bond-holders and those with defined-benefit pensions are rentiers, then the principal rentier class in modern USA is comprised of the public employee unions.

  10. Gravatar of Morgan Warstler Morgan Warstler
    6. July 2011 at 14:58

    shocking, current savers will spend, just force the banks to liquidate 12M houses in $1 auctions.

    Our policies right now should be about letting savers cash in all their skee-ball tickets, and capture a major piece of the hard assets currently held by those in debt.

    After the transfer of hard assets, we’ll have no such problem.

    When those in debt, no longer live in houses they cannot afford, when the banks that are insolvent are busted up and sold off – we can start the music up again.

    but right now the wrong people are sitting in the chairs, and the music won’t start until they are gutted.

  11. Gravatar of Bill Woolsey Bill Woolsey
    6. July 2011 at 15:03

    Suppose you sold off your stocks in 2008 and purchased T-bills or just hold FDIC insured bank deposits. Deflation benefits you now.

    Suppose you are old and upper middle class, and you have already moved out of stocks and are in government bonds. Deflation benefits you.

    People holding bonds with credit risk, like corporate bonds, should be able to benefit from deflation–they can strip the stockholders of all equity. For example, a debt to equity swap leaving the former stockholders nothing. If they screw up and force liquidation, then the bondholders might end up with less real wealth. It seems to me it depends on the initial leverage. Deflation can allow debt-holders to gain from a low leverage firm.

    If you have a long term lease with a farmer who rents you land, deflation allows you to strip his equity. (I think these are the “rentiers” literally at issue, probably not important today.)

    Tradionally, the notion was that deflation benefits “rentiers” at the expense of entrepreneurs. By adding together stockholders and bondholders (as you are doing and Krugman does to make this a rich vs. poor issue,) this key distinction is lost.

  12. Gravatar of Jason Jason
    6. July 2011 at 17:01

    I wonder if this “rentier” vs “worker” conflict is better viewed from the standpoint of loss aversion rather than gain acquisition?

    I agree that NGDP targets will help everyone. However, maybe the “rentiers” (irrationally) prefer a path that hurts them less than it hurts others to one that benefits them more than it benefits others.

  13. Gravatar of Scott Sumner Scott Sumner
    7. July 2011 at 08:14

    Master on None, I think you need to reread Krugman, as you clearly don’t agree with him. He says holders of financial assets benefit, and they don’t, or at least 95% don’t.

    Shocking, Yes, I did a post a while back arguing that savers benefit from more inflation when in a slump. Even real interest rates fall in a slump.

    Bill, You said;

    “Suppose you sold off your stocks in 2008 and purchased T-bills or just hold FDIC insured bank deposits. Deflation benefits you now.”

    No, as I said to shocking, even real interest rates fall in a slump. At full employment the real rate on T-bills would be higher. I will agree that someone buying 30 year bonds in 2008 came out ahead.

    You said;

    “Suppose you are old and upper middle class, and you have already moved out of stocks and are in government bonds. Deflation benefits you.”

    But Krugman was describing whole classes of people, and government bonds are a very small share of the US public’s investments. His argument applies better to the Chinese.

    Didn’t corporate bonds lose value in 2009?

    Jason, Possible, but the stock market fell much more than worker wages in 2007-11.

  14. Gravatar of Will Will
    8. July 2011 at 14:15

    Rentiers are persons with passive income. The word derives from the rent of the landlords of old, in the Ricardian sense (differential rent that rewards title rather than activity). Krugman is, I suspect, referring to Michal Kalecki’s essay on the politics of full employment, which is freely available online, in which Kalecki speaks of an alliance between captains of industry and rentiers to urge caution and austerity during downswings.

    Master of None is incorrect to assert that rentier interests want continued 0 percent interest rates, just as Scott is wrong to say that they favor devaluing the dollar (though in Scott’s defense, I think he misreads rentier as “rich person” or “investor”). Indeed, such people want *higher* interest rates, which is why we hear so many calls for higher interest rates, such as Paul Ryan made last year.

  15. Gravatar of Scott Sumner Scott Sumner
    8. July 2011 at 17:33

    Will, I didn’t misread, I used Krugman’s definition because I was commenting on his argument. I suspected he had defined it incorrectly, but that makes no difference to my argument.

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. July 2011 at 19:46

    Scott,
    I thought Krugman was referring to owners of agency securities, structured finance instruments or derivatives. Apparently owners of these assets are highly senesetive to inflation. And it just so turns out owners of these assets are almost entirely in the top 1% of the income distribution.

    P.S. Yeah, I don’t own any agency securities, structured finance instruments or derivatives either, so I’m not even sure what they are.

  17. Gravatar of ssumner ssumner
    9. July 2011 at 05:55

    Mark, No, he is very clear; he includes stocks, commercial real estate, and all sorts of other assets that have been crushed by the Fed’s tight money policy.

    Did you read the Krugman post I linked to?

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. July 2011 at 13:30

    Scott,
    Absolutely. He says:

    “Financial securities are overwhelmingly held by the rich “” more than 60 percent by just one percent of the population, more than 98 percent by the top 10 percent. It’s true that middle-class Americans own significant shares of deposits, and that some part of their pension accounts would be in bonds. On the other hand, middle-class Americans owe the lion’s share of debt; relatively speaking, the wealthy have hardly any.”

    Financial securities, which he makes apoint of singling out, are distinct from stocks and commercial real estate in the list that he provides (which comes from Edward Wolff). Whereas the bottom 90% own just 1.5% of financial securities they own 23.1% of non-home real estate and 18.8% of stocks (directly or indirectly). Financial securities are far less inflation proof than stocks and real estate traditionally have been, and I think that is part of his point.

  19. Gravatar of Scott Sumner Scott Sumner
    10. July 2011 at 07:03

    Mark, Sorry, I misread the post–thinking he was including the entire table. I still don’t agree, BTW, as tight money produces lower real interest rates in T-bills, and reduces the value of risky corporate debt and MBSs.

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