People pathologically hoard so much cash that they impoverish the entire nation

Question

"If a man has an apartment stacked to the ceiling with newspapers we call him crazy. If a woman has a trailer house full of cats we call her nuts. But when people pathologically hoard so much cash that they impoverish the entire nation, we put them on the cover of Fortune magazine and pretend that they are role models." - B. Lester

My aunt posted this to her facebook page. She believes that people are poor because some other people are rich. I know that is totally fallacious, but I don't know how to explain it to her. Can any one help me to explain it to her?

Answer 1

But when people pathologically hoard so much cash that they impoverish the entire nation

This sentence seems to imply that we should fault the rich not because they are rich, but because they do not spend their riches.

Ok, let's scrutinize this assertion, and not go into philosophical and sociopolitical arguments about inequality, justice, etc, which is a totally different discussion and off-topic on this site (although I suspect that your aunt may in the end has something like this in mind...)

Who said rich people don't spend their riches?

1) Last time I heard, we are all too ready to criticize them for "lavish life-styles". But lavish life-styles cost a lot of money, so it appears they do spend a lot...so part of their riches becomes income for the rest.

But they are still rich!

2) Yes, because most of their wealth is invested in productive economic activities (directly or indirectly through mutual funds etc).

It follows that wealth is NOT "hoarded" - because hoarding means "stash away wealth, don't spend it, don't invest it, just stash it away from any interaction with other humans and economic activities". A "Scrooge McDuck" kind of situation.

This is not what is happening in today's world, and so the specific sentence from this excerpt is simply factually wrong.

Now, the fact that even without hoarding, rich people may stay rich or become richer, the fact that there are people dying of hunger while others live lavish life-styles, in other words the issue of wealth and income inequality could be certainly an on-topic subject here if, indicatively,

a) It was examined as regards its effects on economic efficiency (there is growing evidence that efficiency and distribution are linked and that inequality affects negatively efficiency and economic growth, see for example this recent IMF report)

or

b) It was placed and studied in the context of normative economics (and "normative" is not a synonym for "value judgements" or "opinions"). I would suggest to check this meta-thread on the matter.

Answer 2

Her position isn't quite untrue. If you define poor and rich relatively, you cannot have "poor" without having "rich." However, this has little to do with hoarding.

We often think of money in terms of the medium it is stored. We typically understand a vault full of cash. However, such a vault isn't doing anything. Money does things when it is in motion. It is a medium of exchange, not just a medium of storage. When it comes to impoverishment, we're talking about people who want to spend money but don't have it. We're focusing on the exchange half of the equation.

Goods and services will always be exchanged. Nobody really wants "dollars." You can't eat them. You can't build a house with them (well, not a structurally sound one). What you can do is use them to facilitate exchanges of goods and services.

If someone hoarded a bunch of money and made it clear that money isn't going to be returning to service any time soon, it would have a substantial effect on prices, but in the end, the people who want to eat bread will eat bread. The people who want to buy Rolexes will buy Rolexes.

The one case I can think of where hoarding could actually "impoverish a nation" is if they hoard large sums of currency and the threat that they may use it all at once wreaks havoc on the market. If you know that a bunch of dollars could suddenly enter the market at any moment, you know that the value of any dollar could deflate rapidly at any moment. Accordingly, you'll try to minimize how often you're holding onto a dollar. You'll focus on holding on to tangible goods instead. This could slow the velocity of a market, which could impoverish people who can't get the things they need because the market is moving too slowly out of fear.

Answer 3

The argument is largely based of the following premise:

You have 10 Million Dollars. Say in one case you gave it all to 1 already rich millionaire, and in the other case you gave $1000 to 10,000 poor people, where we define a poor person as someone who does have somewhere to live (not homeless) but lives paycheck to paycheck and to whom even something like their Microwave breaking could mean not eating properly for a while.

The person who is already rich would probably struggle to spend that $10 Million quickly. What most rich people would do in that situation is invest it. The kind of things you could easily spend \$10 Million Dollars on are in very select industries, which are predominantly run by already rich people, effectively passing the money from 1 rich person to the other.

What all this means is that it takes a long time for the system as a whole (and in turn, those who require aid from their government) to see the money again. Furthermore, the rich have much more opportunities to avoid tax than someone making minimum wage at Walmart.

However, if you give the 10,000 poor $1000, they will likely spend it almost immediately. The money very quickly goes from wages back into the economy and back into wages again, driving growth. This in theory leads to better wages for workers and lower inflation, as well as more tax revenue for the government.

Now, this uses very general examples and assumes a lot of things, but it's pretty much the argument that the post is trying to make.

Answer 4

This particular statement posted is actually two separate statements that are being conflated despite not being related:

Statement 1:

People who collect many newspapers or cats are called "nuts" by "us"

Statement 2:

People who have a lot of money impoverish the nation, but "we" treat them as role models and put them on the cover of Fortune

The verbal slight of hand here is that newspapers or cats are comparable to money. The basic reason that "we" find the latter to be desirable is that money is more useful than cats or newspapers.

Even someone who loves cats will eventually find that for each additional cat they purchase or acquire their desire to have an additional cat diminishes. This is called marginal utility.

Someone who collects newspapers actually may have a pathological problem with their collection. Newspapers are generally only useful once, or shortly after they were printed. The have reducing utility for each passing they they are collected and take up time and space to store appropriately. In rare cases, some newspapers and cats can hold value to others. However, typically they are not exchangeable and so they only provide utility to those who have some kind of attachment to them.

Cats and newspapers are also not easily fungible. With currency, you can have smaller units. So you could purchase an item for 10 cents with a dollar and still keep the portion that you did not spend. This is very difficult if you are trying to exchange for goods or services with a cat. Similarly, newspapers are not easily convertible. While they may have a high utility to someone, they do not have much utility to other people.

Money, on the other hand, is useful because, typically, it is something that is both fungible and convertible.

According to the APA:

Being careful about how you spend your money can earn you a reputation for being frugal, but when the penny-pinching goes too far and money is essentially hoarded, that can be a symptom of obsessive compulsive personality disorder.

Frugality is a symptom of obsessive compulsive personality disorder (OCPD) when a person "adopts a miserly spending style toward both self and others,...

“People with OCPD are people who are very preoccupied with details, making lists, workaholic, very frugal. People with OCPD do not have intrusive thoughts, so they don’t worry about their symptoms. To them, they wonder, why is everyone else not as organized and as neat as I am?”

People with OCPD might be so frugal that they'd go to a food pantry or skimp on essentials, even if they had enough money for all they need.

During a recession or economic hard times, when tight budgeting is widely admired, it can be tough to know if you’re overdoing it. The most important sign that you’re going too far, he says, is when your frugality negatively affects relationships or the quality of your life because you can’t spend time or money on fun or relaxation.

Or put another way, pathological hoarding is only the lack of action to spend money, not the collection of it.

Further, people who have a lot of wealth generally do not have a lot of cash, per se. The people on the cover of Fortune, as the quote mentions, have large holdings of companies. And what cash they do have, the bank turns around and invests the money themselves, such that money is rarely sitting in a vault somewhere being hoarded.

When they invest their wealth, their value is derived from their holdings. When we say someone is worth $x million/billion dollars we are saying how much money you could get by selling all of their ownership and converting it to cash by selling it. Ownership of a company is less convertible than money, though still more convertible than cats. If you sell several million shares of a company, the price will probably go down because of the additional quantity supplied. When the price goes down, the value of the company goes down. This means there is less money for the company to spend on increasing supply (often by hiring workers), diversifying their products, or acquiring better facilities.

So even when someone has a lot of wealth, they probably are spending the money (not hoarding it) but they are spending it in ways that also have high marginal value for themselves. People who have pathological hoarding collect things with negative marginal value, like cats.

Tl;dr, the FaceBook response should probably be: "Because money is more useful than cats."

Answer 5

When people hoard cash they actually increase the value of everyone else's cash.

Why? Because if they didn't hold it then some of it would instead be sold to the investors who support the price of the currency using different currencies.

When it was dumped in this manner, everyone else's currency would be decreased in value on a per unit basis, yet most would have the same amount.

Answer 6

This assumes they store their own money in their house. Like a room full of bills. If that's the case, if billions of dollars are stashed. Then it technically would reduce the supply of money and thus increase its value. If that was the case, we could call them crazy (unless it's drug money). But that's not what is happening. They store their money in a bank or invest it. In either case, the bank loans or invest the money to people who needs it.

Answer 7

I think that your aunt is confusing cause and effect here. Rich people staying rich is seldom the cause of poverty, rather it is a parallel effect. The cause of much poverty and much wealth is the legal/social/economic environment that maintains stratification.

Many poor people stay poor because of the situation that they are in. They live in neighborhoods that the cops only visit when weapons are reported; they pay taxes on most of the money that they earn; medical services are distant; even fresh veggies are scarce. Their local schools are often not very good.

Many rich people stay rich because of their environment. The cops will show up merely at the report of a vagrant; there are lots of tax loopholes to hide their earnings; the University medical center is a mile away; Gelson's and Trader Joe's compete for optimal retail space. The schools are top notch, often blessed with funds secured by local parents.

BTW, I use the term 'environment' to mean more than just a physical location and its character. Rich kids may absorb the concept of tax-free annuities from hearing their parent's casual conversation; poor kids hear about the purchase of new anti-theft bars for the windows.

If your aunt wants to make a more balanced society, she will not do so by resenting the rich. The way to solve the problem is to increase the mobility between groups.

Answer 8

One of the most fundamental aspects of economics is scarcity. We have a limited amount of material resources. Not everyone can have everything. However, through specialization, some become very good at making or acquiring a few things such that they have excess. Large-scale trading of excess becomes difficult without a system, thus we have money. Money is a system of perceived value that facilitates trade. However, money is not intrinsically as valuable as its perceived value (you can buy a filet mignon steak, but you can't eat the money at all). This system has lead to two modern economies which I like to call the material economy and the monetary (money) economy.

The material economy is everything you eat, drink, sleep on or in, or otherwise use in your life (your home, car, jewelry, etc.). The monetary economy, on the other hand, is simply the money we use to represent those things.

Here's where the problem with your aunt's statement lies. The first things she lists (newspapers and cats) are material things that physically take up space and thus, when hoarded, act to the detriment of the person's capacity to act productively or live comfortably in their daily life. Money, however, is mostly imaginary. It exists in computer databases and is a tool used to acquire the material goods one needs/wants at their behest, and improve their productivity and ability to live their daily life comfortably. Money is not something that is hoarded in the sense of filling their house with paper money. Instead, people like Warren Buffet frequently invest and move these digital assets to stimulate activity in the material economy. Often, the wealthy do this as an intellectual exercise/hobby for them that adds to the quality of their life and the productivity of other industries as a result of their investments.

Hope this helps.

Answer 9

It is difficult to what exposure that lead Lester B. Pearson giving out such statement, the quote itself is a metaphor.

"people pathologically hoard so much cash that they impoverish the entire nation" does not apply directly to any "rich" person, but "people pathologically hoard so much cash".

There is a few category of people that fit such criteria:

1. Corrupted politicians that hoard cash inside Swiss bank or even in their home.
2. Rent seekers that collaborate/lobby politicians that create monopoly rent seeking business with little to zero investment in innovation.
3. Criminal syndicates,
4. Various investment/hedge funds(e.g. retired funds) that took money from 1,2,3 execute speculation schemes.

So the mentioned quote is more serious than inequality in wealth distribution. Even today, there is too little exposure to public the dangers of such "pathologically cash hoarding".

The stock speculation cycles, subprime loan derivation bubbles, Wallstreet various acquisition, is indirectly due to "pathologically cash hoarding" mentality.

Ironically, what OP aunt think is not all wrong. But it doesn't fit very well to the big picture of the quote.

Obsession in wealth hoarding is indeed the root of the government corruption, thus cause funds use to help minority in poverty vanish in the distribution channel.

Answer 10

Given that the quote is partially extraneous to the question, I am answering two elements:

People pathologically hoard so much cash that they impoverish the entire nation

As others have pointed out, cash hoarding is unusual and impacts chiefly on the supply of physical money and its price. If we consider banked cash as a hoard, we would mostly consider this malinvestment and pathological as well. But does it “impoverish the entire nation?” No, it only impoverishes the proletariat of that nation by relative emiseration (Capital in circulation : wages; ie by increasing the organic composition of capital). She is advancing some kind of “exploitation” theory.

She believes that people are poor because some other people are rich. I know that is totally fallacious, but I don't know how to explain it to her.

Well, it isn’t fallacious. Apart from the trivial pie division example that larger slices require smaller slices, there’s the classic difference between the price of socially average necessary labour power and the realiseable value embodied in that labour’s product. As noted in relation to relative emiseration, if you take a measure of money over time like %GDP/capita a growing economy with private ownership of capital will show a declining wage.

As far as explaining it to her, or even better talking with her, I’d suggest face to face after shouting her lunch, and with plenty of tokens and pen and paper.

I’d suggest size of the slice, versus size of the pie. The problem of effective demand versus real desires (ie: why the size of the slice matters, because real desires are normative not objective measures, thus share of social power is important,) and probably a simple explanation of Marxist exploitation, including that labour mustn’t get the full product of their labour due to capital depreciation etc.

If you can use these teaching models to help her figure out what she believes about the appropriate ordering for social power, you can equip her with a strong opinion from an allied political economy on whether the rich emiserate the poor and how money works. If you go in trying to re-educate her to your particular normative beliefs she will resist and refuse.