Berkshire’s Charlie Munger has a very blunt response to those ‘driving rich people away’ as Amazon scraps HQ2


Market Watch has the article Berkshire’s Charlie Munger has a very blunt response to those ‘driving rich people away’ as Amazon scraps HQ2.

Driving the rich people out is pretty dumb if you are a state or a city.
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The idea that beautiful real estate in Connecticut, down 50% in value, They’ve driven out all the rich people.

The second part of the excerpt helps us understand what Munger means.

In his book J is for Junk Economics: A Guide to Reality in an Age of Deception, Michael Hudson is frequently decrying “asset-price inflation” such as real-estate. I can’t find a succinct quote that explains what he is talking about, so I will try with the following excerpt. I’ll see if I can briefly explain the importance of this.

The Distortions of today’s statistical categories

These statistics do not reflect the major way in which the largest sectors – real estate, mining and fuel, banking and finance – take their economic returns. They seem to operate without reporting a profit, but their capital gains are not traced. Despite the fact that real estate and stock-market prices gains have become the way in which most homeowners, investors, and the One Percent have built up their wealth, this distinguishing financial phenomenon of the present era – asset-price inflation – does not appear in NIPA [National Income and Product Accounts] or anywhere else. “Capital” gains are excluded as being “external” to the post-classical model of how the economy works. There is nothing akin to Mill’s concept of landlords or other rentiers making land-price gains “in their sleep”.
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Instead of viewing the economy as multi-layered, the NIPA group “households”, from wage earners to rentiers, from the One Percent to the 99 Percent. Increased income for anyone is supposed [to] make everyone else better off, because “the market” or GDP expands, and all other variables are plugged into it – as if it does not seem to matter for whom this wealth accrues, or whether they get it by rent extraction, financial gains, wages[,] or profits on new direct investments. There is no recognition that economies may collapse from enriching financial or other rentier elites at the majority’s expense.

As Hudson points out in many places in his book, the increased asset prices just require the 99% to get larger mortgages. The financial sector reaps higher interest payments from these larger mortgages instead of landlords getting economically justifiable rents at lower asset prices for properties that are rented out rather than owner occupied. These capital gains from rising asset-price inflation can be illusory as the crash of 2008/2009 showed. If you borrowed 95% of the value with a mortgage, you had a good chance of defaulting on that mortgage and losing all of your “capital gains”. You also lost whatever other equity you had in the real-estate.

The drop in value in that Connecticut real-estate that so upset Munger, was like a return to real value that had previously been inflated by having all those rich people living there. I have been tempted to look at real-estate in Connecticut as it seems much cheaper than the real-estate over the border here in Massachusetts. The super-rich just do not understand the 99% the way that Alexandria Ocasio-Cortez does.

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