I guess pretty much everyone knows this, but for those who don't, the federal government has been talking about trying to drive up inflation and drive down the value of the dollar compared to other currencies through something called quantitative easing. This is a technical euphemism for printing more money.
There are a lot of objections to quantitative easing mostly, though not exclusively, from the political right. As is often the case, these objections can be broken down into two general groups -- the objections of people who don't have any money and interpret the world through a sort of crackerjack protestant code of moral absolutes, and the objections of people who do have money and who interpret the world through a code of getting more money or -- and this is really the rub -- making sure the money they have stays valuable.
The moral objection basically says that it's not cool for the United States to devalue its foreign debts by devaluing the dollars those debts are to be paid in. There's also a line of thinking that it's not cool to penalize people who saved money and were frugal while giving a reward to those who piled up a lot of debt. I guess it's the second issue I find compelling, speaking as someone who has something like $60k in education debt, plus a mortgage. But it matters in a more general sense as well.
The old argument on inflation is that it's regressive -- that the burden for inflation falls harder on poor people than on rich people, because rich people only lose savings, but that poor people get caught in the margin between rising prices and relatively static minimum wages. And that was basically true, even 40 years ago. But over the last 40 years, credit has become much more common, and credit cards in particular have become much more common. Pretty much everyone -- even really poor people -- have tons of consumer debt. The old equation, about rising prices running ahead of minimum wages will continue to be true. But it will be offset in the medium term by a reduction in the value of debt.
The longer term is more interesting. Or at least I find it more interesting.
And I guess I'm just going to take a minute here to riff about real estate values.
In 1984, a large house I know of in a desirable West Coast city sold for $60k. Four years later, in 1989, that same property sold for $90k. In January 2007, the value of that home peaked at $676k. It's now estimated to be worth $490k. Now, let's take a minute to compare those prices to inflation.
1984: House = $60k, compared to $60k in 1984 dollars; minimum wage = $2.30
1989: House = $90k, compared to $72k in 1989 dollars; minimum wage = $3.85
2007: House = $676k, compared to $118k in 2007 dollars; minimum wage = $7.93
2011: House = $490k, compared to $126k in 2011 dollars; minimum wage = $8.76
First, I guess it's worth noting that the inflation rate in the United States is pegged to the Consumer Price Index, and that the CPI is calculated by the federal government's Bureau of Labor Statistics, and that it's bullshit. It's a bullshit number. The government has all kinds of incentives to keep that number as low as possible and, even if they didn't, it just so happens that a lot of the industries that determine the value of the CPI are heavily subsidized to keep the price of their products down. So one way of describing the CPI is to describe it as "a basket of goods and services." A lot of the goods in that basket are groceries, and groceries in the United States are much cheaper than they should be because of farm subsidies. So. Inflation. Bullshit number. But it's one benchmark so, moving right along.
Second, it's also worth noting that the price of real estate isn't just the price of real estate -- it also tends to be very closely related to the price of rent. There are some places where this is only partly true, and some places where it's not true at all. I heard recently that mortgage payments in Brooklyn are going to be something like three times the cost of rent for some people. But, generally, mortgage payments and rent will be sort of in the same neighborhood of each other and, when real estate prices double, rents will generally double too because the people who own the home you're renting have to cover their mortgage, and they're going to pass that on to you.
Third, the price of residential real estate has coincided, in a very correlative and non-specific way, with a similar increase in the price of commercial real estate. This probably has less to do with a general increase in the price of real estate than it has to do with the growth of credit that I mentioned earlier. This credit bubble has fueled changes in consumption patterns, including a sort of terrifying increase in the number of restaurants and bars, as well as retail stores that sell semi-durable consumer goods like kitschy African art and t-shirts that say, "I know you are but what am I?" Basically, it has become possible to make a lot more money on retail than it used to be, because there has been a lot more consumer credit available. Zoning laws in most major cities create an artificial scarcity of commercial retail space that basically pegs the value of commercially zoned real estate to the value of the businesses that can occupy it, rather than the value of the land as it would be determined by the real estate market at large.
Points two and three relate to a couple of issues that I think are pretty important. One of those issues is land use, which relates to sprawl, which relates to air pollution, water quality, and workers' rights.
It goes something like this: once upon a time, factories were in cities because cities had the largest concentrated pool of semi-skilled labor to work in factories. Take a look around any decent-sized city, you'll see huge old buildings that used to be factories for companies you've probably even heard of -- Ford Motor Company, General Electric, Western Electric, Wonder Bread and so on. People lived near those factories, and tended to live so densely that they could take public transit to get to them. Then (at least) three things happened. One of them has to do with international trade, and we don't need to get into it here. The other two were the increasing mechanization of manufacturing, which made it possible to replace semi-skilled workers with a smaller number of unskilled workers, and the increase in the price of real estate in the city. So, basically, if you want to open a factory, and you only need five people with an IQ of 80 or above to run the thing, where are you going to put it? In Manhattan, where real estate goes for something like $100,000 per square foot, or in rural Indiana, where real estate goes for something like $10 a square foot AND the state will give you tax breaks to come there? Easy question.
But here's the thing about that. When the person who makes the t-shirts that say "I know you are but what am I?" opens a factory in rural Indiana, he or she typically builds a one-story building with a torch-down roof and a large asphalt parking lot. It costs more to heat and cool, but the state's giving them a break on utilities, so what the fuck. Then workers are expected to commute in from all over the place, and the population density out there is so low that there's no point in even trying to have public transit. So what you get is, you get people driving 30 miles, pumping out air pollution and dribbling motor oil all over the place, paying for their own cars and their own gas out of their wages, on their way to a square mile of blacktop that soaks up heat, increases the temperature of the rainwater that falls on it, decreases the oxygen content of the water, kills fish, causes algae blooms and, also channels the rainwater, rather than allowing it to soak into the ground, which increases the flow rate and leads to more flooding and erosion. And let's not forget that by scorching a square mile of earth into a hardened tar-like shell, the factory and its parking lot have also wiped out a bunch of grass and trees and shit that would otherwise be helping to mitigate all this pollution.
And don't even get me started about how the high price of land in cities makes it harder to build ecologically or aesthetically sound buildings. You know those ugly, ugly new condos you keep seeing? When a developer pays $2 million for a 1,000 square foot lot, they couldn't build an attractive building on that lot if they wanted to.
Anyway, I could go on about this all day, and I'll probably come back to it at least a few times, but the point here is that the high price of real estate, and the disproportionately high price of real estate in cities, fucks everyone up.
But here's the problem -- all that over-valued real estate is financed with loans and mortgages. The people who own those houses and business literally cannot afford to sell them for what they should be worth, if we wanted cities to be anything other than giant money pits.
So, what's this got to do with quantitative easing?
Simple -- there are two ways to bring the price of real estate more in line with inflation and wage growth over the past 30 years. You can bring the price of real estate WAY down, which would basically mean wiping out millions of homeowners and defaulting on trillions of dollars in mortgages. OR you can devalue the currency the mortgages are written in, putting upward pressure on wages, and making it easier for American companies to export at the same time you make it easier for American factories to move in closer to major population centers.
And those are some of my thoughts on quantitative easing.
