Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Three Forms of Saving; Working Capital, Debt, and Equity. Maybe Four.

Assets Forced into Three Categories

John Maynard Keynes is said to have invented the discipline of macroeconomics about 1930 when he wrote a book "The General Theory of Employment, Interest, and Money". That he was brilliant had been established for decades, that he was invariably correct has been debated. In the final chapter of The General Theoryhe concluded that protracted low-interest rates would ultimately lead to a disappearance of the coupon-clipping rentier class. That is, that money would become so cheap that no one would pay to rent it.

Keynes know he could not predict wars and other shocking events, so he ventured no opinion about the timing of this cataclysm, but it is clear that signs of it are appearing sooner than he expected. The causes of this acceleration are mainly medical, including both a lengthening of longevity and an increase in the cost of achieving it. The best sign of a connection for non-economists lies in the transformation of implicit goals of the rentier class (undesirable) into prolonged retirement (desirable, possibly even unachievable.)

To every economist' surprise, inflation has not yet made an appearance, and inflation itself has made a reverse transformation, from confidently expected, to mysteriously missing from view. Von Hindenburg and Adolph Hitler may yet exchange positions of general esteem. But no matter how hard it tries, it appears as though the Federal Reserve cannot raise interest rates above 2% by inflating the currency. That's both a surprise and a discovery, that economics doesn't work in quite the way we thought.

A recent puzzlement has also arisen in the new instrument called a hedge fund. The purpose of this asset class appears to be to conceal the tax status of these assets until the last possible moment before the sale to a new owner. One may accept the division between "two and ten" as a permissible arrangement between buyer and seller, although it seems rather expensive. But the lock-in period seems to have the purpose of concealing its true nature from the taxman. While it is true that sales of Canadian forests may justify a long investment period, most hedge funds now exceed one year's compulsory lockup, and permit shifting of tax status for long periods of time without any obvious tax-based purpose.

Originally published: Wednesday, July 31, 2019; most-recently modified: Saturday, August 10, 2019


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