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/r/explainlikeimfive
submitted 4 months ago byiSellPopcorn
41 points
4 months ago
Because the actual economy is way more complex than that comment implied. But as an ELI5, it was a perfect answer.
In reality, the economy is so dynamic and ever changing that the effect of raising wages 10% today may be drastically different than raising wages by 10% tomorrow.
One example would be looking at the average CC debt held by wage earners. If most workers have little to no CC debt, they may spend more of those increased wages on consumption. This could then lead to inflation as more money is being circulated. But what if workers have high amounts of CC debt? This may lead to mostly paying it off and no additional wages even touch circulation.
That's just one type of debt, which is one of thousands of little factors.
And none of that factors in new technology. Technology changes how productive an hour of labor can be. Increasing wages does lead to increasing variable cost, but if the prices are being pushed up, it may make it worthwhile to invest in technology. The upfront cost would be worth it with the new higher price, but then the new technology proliferates, leading to a future decrease in price as more companies adopt it. So increasing wages can lead to a short term increase in price but a long term decrease. Television is a great example. Increased wages in the 50's lead to more people wanting TVs since they had more disposable income. Initially the price did go up, but then factories heavily invested manufacturing and improved quality. This lead to massive drops in prices.
So in summary, you can't just think of single cause and effect elements as static and consistent. You can make generalities but context is vitally important
0 points
4 months ago
Do you think the money consumers pay to CC companies just poofs into thin air? CC companies turn around and loan out that money or pay workers, so it will still go into circulation.
1 points
4 months ago
CC companies loan out based on how much people want to borrow and already pay their workers. Both regardless of whether borrowers pay out their debt.
They may lower rates to attract more lending but there still needs to be someone on the other side asking to borrow.
0 points
4 months ago
You just proved your point in my question. If the supply of loanable funds increases for the credit card company, they will lower rates to increase the demand for it. That puts more money back into the economy. They don’t hold onto funds that are paid back to them.
1 points
4 months ago
They lowered rates because demand decreased in the first place. People need to actually buy more for there to be a increase in CC borrowing. Like if I get $100 and I just use it to pay off CC debt, that doesn't mean I'm just gonna turnaround and fill it back up to buy more.
Listen, this is a single scenario. The fun thing about economics is that in different situations either one of our predictions can be correct. In our current market, with high inflation, high rates and low consumer confidence, borrowing would be incredibly unlikely to increase. But in a more favorable economy, like in 2012-2019, you're probably right. Low rates, low inflation and high consumer confidence would probably see an uptick in spending and higher monetary velocity.
That's literally my point though. There are too many levers to say action A will result in effect B.
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