That being said, when I read the tea leaves I see the PC market as stagnant, not shrinking. (Most people who want a PC have a PC, but there is some room for growth. So you are mostly looking at replacement sales, and I can’t think of anybody who has replaced their PC with a tablet.). You can make a decent steady profit in a mature market dominated by commodity products, but it takes different business plan than a growing, dynamic market.
We might be splitting hairs but Lenovo’s official headquarters is in North Carolina. That is, when Lenovo has to list it’s physical address, it lists NC. Which in and of itself is limited information. There are some companies where the headquarters is just a small rump part of the larger company.
There is also the country of domical, used for taxes, IIRC is China. And then there is the country of risk, which is where the 3 major centers come in.
The reason why I am pointing out that the headquarters are in NC is that it implies that there are Americans in high positions. Maybe not the top and maybe not the dominate positions, but still positions of power. It implies that NC is something more than a low end, low value assembly shop or that Lenovo is transferring out knowledge wholesale, hollowing it out, and then shutting it down.
As somebody who supports free trade we are going to see more cases like this. Lenovo raises some concerns, but these are the typical concerns of increased foreign trade. There are other companies, such as Hewitt, which gives me pause. Hewitt is a very closed and murky company.
IIRC Lenovo is headquartered in the US and just opened another plant for PCs in the south. I don’t want to dismiss all of the concerns but let us try to put this in perspective.
Really? Where are you getting your information from?
IIRC, last year Lenovo was gaining market share. (This was back when Dell was trying to take Dell inc. private, one of the reasons was that Dell was losing market share to Lenovo and HP.)
We're assuming the supply is fixed (as with Bitcoin in the long run),
Let's not. We can assume that the amount of currency is fixed – not the amount of money – that was the thrust of my argument. If you did not like the examples above let me give you another one – fractional banking. When trust is high and the economy is good one can run a bank at a 20 to 1 leverage, so for every 1 dollar of currency I can generate $20 in money (not quite true but it is close enough to the mark). In a recession or a time of crisis I will need to lower my leverage ratio to 10 to 1. Nearly half the money disappears. Don't like the fractional banking system? That fine, there are many historical examples (which are more complex) from the age of the gold system. In good times the money supply expands, in bad times it shrinks – even if the amount of currency is held fixed.
Deflation is often blamed, but the only real correlation is the American Great Depression
Actually I can come up with many examples from when countries where on the gold standard. The 19th and early 20th century is littered with them. 3 financial crisis in America between 1870 to 1910. England in the interwar era. But that is off the point – I can find many examples where GNP is going one way and deflation is going a different way.
On the investment side we may be talking past each other. You can't invest in the “average return” of America, and “required return” has inflation factored in so less of a concern there. Then there are the pension funds, which control a vast amount of funds, which are not interested in getting a average return. The pension contracts specific a required rate and the insurance companies try to reach that rate with the minimum amount of risk.
I am going to recommend 2 books. Lords of Finance by Liaquat Ahamed. Or A Monetary History of the United States, 1867-1960 by Milton Friedman. The first is a light popular historical bit about the creation of central banks. The 2nd is a bit more weighty.
Actually, as deflation increases nominal interest rates fall. Real rates might rise – or maybe not – it depends..As for borrowing, we all borrow even if it is from our future self. You need to factor in the opportunity costs. What you say for houses also goes for investments in plant and equipment for companies.
Here may be a better example. If real rates go up this means borrow to pay for your education goes up. Yes, one could delay college for 5 years to save up money, but then you spend 5 years of you life in a lower skill lower pay job. On average it is better for you to take the loan and complete your education early.
Mortgages use simply interest. Take the balance of the loan, multiple by the interest rate, divided by 365, multiple by the days in the period. If you incur a late fee that late fee is not added to the balance of the loan. You are not charged interest on interest.
What you want to look for is some type of loan where the payments are less than the interest and the interest can be charged on the prior interest. There are Payment-In-Kind (PIK) bonds but those are rare. Rolling over unsecured debt (credit cards, pay day loans) would not technically qualify since they are new loans but would have the same effect.
Why are we disagreeing? I am saying skewing, you are saying exacerbating. Can we split the difference and agree that it is something bad?
Probably so. On the other hand the knowledge of all that untapped money could motivate more businesses to spend more resources on coming up with ways to increase real returns to 11%.
No, it would not. Consider it a drag force. If I put a parachute on the back of every new car can I make the argument that this will encourage engineers that much more to design a more efficient car? No. They are striving to make a more efficient car today.
By “savings” I mean holding onto cash – we are not talking about investing in the future. For consumption, health care, research and education are all things we consume and are part of GNP. If you increase spending on those 3 you will increase GNP. Where are we going to get the resources to pay for this? If you want to argue against ramped consumerism you can but that is a different argument then growing GNP.
Are you trying to argue that we should advocate policies that benefit the wealthy over the rest of society because it is inevitable? Have you lost all hope? At the very lest you have gained the knowledge of how you are being screwed over.
And no, we need more productive assets. Real productive assets don’t require much energy. Building a wind farm, making a movie, engaging in R&D – these are all real productive assets. “Real” is not being used to describe a physical item but something that has economic value. i.e. things that move the ball forward.
Financial assets are debts that people owe. Think government bonds. (and no matter how many government bonds are purchased, it is not going to move the economy much). Mortgages on newly built McMansion. i.e. trading paper.
Interest rate = real interest rate + inflation. As inflation falls the real interest rate increases. Why? Because now you not only have to pay interest but pay it with more valuable dollars. A double whammy.
You mean like right now where they live off of the interest and investments already.
No, it would be worse. Let’s not give more to the wealthy.
As to the middle man argument – that is something completely different. My points were on deflation alone. That being said, Money transfer is the most positive aspect of BitCoin in my opinion. However I don’t think it outweighs the negatives of deflation. I think reform needs to happen but I don’t think it is going to come from this comer.
(And why are you paying compound interest? I have never seen a loan like that.)
Expected deflation of 10% means that the economy is growing by 10%. The average rate of return, therefore, is 10%
Not necessary. Inflation is driven by the change in the supply of money against the demand for money. Don’t assume that currency is money or that the demand for money is fixed. In fact the demand for money is only loosely associated with GNP. Deflation is often associated with recessions. When a recession hits people tend to flock to safe assets like cash pushing up demand. At the same time the recession can prick the bubble on money and “near money” assets, decreasing the supply of money.
Take a look at the most recent finical crisis. Demand for money was low because people could tap their home equity via HELOC. Banks only held 4% of their assets in cash. Post crisis people can’t tap their home equity and banks need to raise their cash position to 8%. Also, post crisis, the central banks have been flooding the market with money yet inflation barely budges. Check out this graph where you can see the Fed dumping money into the economy and only having a modest impact on the money supply.
The only reason to invest in some specific venture (apart from being forced into it via inflationary monetary policies) is that you think you can do better than the average rate of return.
No, the reason why you invest in a venture is because the projected risk adjusted returns are higher than your required return. Personally I am very happy investing in index mutual funds that are designed to return the average rake of the market.
Read the formula again: Real Return = Nominal Return – Inflation. Input different numbers and see what you come up with. If real returns are 10% what would your mixture of investment, savings (holding cash), and consumption? If real returns were 5% what would your mixture be? The higher deflation is the lower real rates of return are, the lower the real rates the lower are the new investments.
Historically people have invested less under deflation. Investments tend to skew towards shorter term projects. Financial assets are favored over productive assets.
To the point of expanding your business – you don’t have to expand your business, or maybe you don’t expand it as much. You nailed it on the head that deflation reduces the real returns to the investor. Carry forward that idea. What would you do if real returns are 10% and you have $100 in your pocket, what mixture of investment, savings, and consumption would you do? If deflation was running at 1%, dropping real returns to 9%, what mixture would you do? Invest less, save more, and delay consumption.
I did another post further down this article. Read up on it for the details but it does not exactly work out like that. In a inflationary environment there is an incentive to spend your cash and invest and invest in productive assets. In deflation the scales are tipped the other way – there is a incentive to invest is safe low risk financial assets.
If deflation is running at.25% a year, then cash has a.5% advantage. With lower real returns there will be less investment in risky investments like restaurant.
And to build out on this further – do we really want to reward people who have already made their fortune? Should we favor the banker over the entrepreneur who needs a loan to expand their business? If we are going to tip the scales should we not favor those who will be making the fortunes of tomorrow?
No, deflation discourages productive and risky investment and encourages holding short term low risk cash assets. Real Return = Nominal Return – Inflation. As deflation (negative inflation) increases the real return falls.
Let us use big numbers to illustrate this point. You can invest in a new business and get a 10% real return. You expect deflation to be 10%. If you invest $100 you wind up with $99 at the end (100*1.1*(1-.1)), but you are better off in real terms by $9. Or you could burry your cash. At the end of the period you would have exactly the same $100, but you would be better off by $10. Better not to invest.
Deflation tends to be lower, between 1% to.3%. But that will tip the scale away from large low risk capital intensive projects. Don’t look at the Great Depression. Look at America between 1870 to 1910. Deflation average about.3%. Lots of financial crisis, power tipping towards the banks and wealthy, lower investment rates.
It is not good for the individual – it depending on who the individual is.
It is good for the individual who has the currency. They gain wealth by sitting back and doing nothing. People who tend to have large net positions tend to be the wealthy and banks.
It is bad for those individuals who don’t have the currency or has a negative position – like a loan.
Except the problem with deflation is not the ability to make change. Any currency can be broken down into smaller units. ½ penny. Farthing. Groat. Etc. We could always coin a milodollar.
The problem with deflation is that it increase the value of the currency and thus transfers wealth to those who hold the currency. The wealthy tend to hold the large net positions of cash so they tend to benefit the most. It favors investments in financial instruments over real productive assets. It also tends to drive up the real interest rates for those who are borrowing.
There is a difference between “prototype”, which implies a experiential design that might be refined and moved into production someday and “custom, bespoke”, where one takes true and tried engineering principles and push them to the extremes.
F1 today tends to fall into the latter category today. For example, the bodies use a lot of carbon fiber. The reason we don’t see a lot of carbon fiber into today’s production car is not because of engineering concerns (we know it works) but because of cost.
D-Wave falls into the first category. Does this particular implantation work? Can it be refined to work better? Or does a different approach to quantum computing need to be tried?
There is a difference in having a adventurous youth, making a poor judgment on occasion, and a deliberate plan that too months to execute.
On one had we have things like the “ILOVEYOU” virus – that I am somewhat lenient on and would fall into what you are suggesting. This Russian teen seemed to have a more thought out plan.
Alas, it is Alas, it is a sirens trap. At the end of the USSR their engineers were great at reverse engineering technology but not so good at inviting stuff.
Today why build something good, solid, legitimate that can take on the west? Because of the kleptocracy of the state. I mean yes, it is a form of economic warfare, and it may win battles but it is destine to lose the war.
Well, I guess my confession is that I am assuming that the correct measurement of education spending is per student not absolute levels. i.e., if the number of students increased by 20% but spending increased 10% I would consider that a cut in spending because we are spending less per student.
If spending levels are held constant, and students transfer to charter schools which are paid at a lower rate than public schools (because public schools get the sweetener of capital spending that charter schools do not.) then mathematically we know that while the absolute dollars going to public schools is declining the per student dollars must be increasing.
Can you tell me your reasoning why absolute dollars is a better way to meaure?
How does charter schools take money away from public schools?
In all the states that I know about, charter schools get paid less than public school per student. They are paid the same for daily operations but charter schools don’t get paid for capital costs. That is, public schools building costs are paid out of a separate bucket – charter schools need to pay for their facilities out of operation costs.
This means every student put in charter schools leaves more money for the public schools. If you want to argue that charter schools are cherry picking the best / low cost students, once again all of the states that I know of require charter schools to take in the higher cost / special needs / disable kids as well.
I think some of our difference comes down to what a company is worth (assets) vs. ownership (equity). I will stand on the point that if you hold bonds (liability) you hold capital in the company, and this thread was kicked off on people holding capital.
As to your points, we may be talking about semantics. Banks constantly play around with this number, trying to be as leveraged as the regulators will allow. This is what private equity does all of the time. And CFOs do it all of the time – even if they don’t do a press release.
Cash comes into a firm. It can be saved, invested, paid out as dividends, used for stock buy backs, or used to buy down debt. Does it matter if it is explicated stated? Because I can find examples pre crisis where this occurred. Is there a difference between a company that uses its cash for a stock buyback and loans for future investments or a company that uses a loan for a stock buyback and cash for investments? CFOs play with this all of the time. In the 80s they levered up with loans. In the 90s they levered up with stock buy backs. Making 5% of the equity go away may seem minor to you. IIRC stock buy backs has removed almost 20% of the stock from the market in the 10 years prior to the crisis. I can find some companies that made 40% of their stock go away over 5 years.
BTW, companies do not exchange stock for bonds when they are in desperate situations. In desperate situations they are looking for fresh capital, not to convert equity to liabilities to leverage up the returns because it also leverages up the risk. And I have not heard of a case where a company exchanges stock for a bond and a “less valuable share”. If you have an example I would like to hear it.
I think what you are talking about are warrants. Warrants are stock options that are attached to a bond as a sweetener to lower the coupon rate. They tended to be issued by companies in distress to get a favorable rate. Warrants may have gone away but they have been replaced by convertible bonds, and convertible bonds are still very popular.
Socialism is not the answer, but market structure does matter. The “New Normal” theory suggest that the new rate of growth will be at 2%. Labor’s share has dropped from a high of 60% in the 1950s to 55% and the trend line continues to point down. This implies more inequity. Moderate inequity is good – it drives the system. If long term growth hits 2%, this implies that labor will revert to the historical average of 40%, and this implies huge inequity. People at the top of the heap are there because they were born at the top of the heap or they won the lottery. How do we keep labor’s percentage up? Not by the heavy hand of the state – which is where tax reform and education come into play.
I am not sure if I am selling anything. Well, maybe tax reform to simplify the code and improving our school system, in particular at the primary level. And then there is this, the upper end if sprinting a lot faster than the middle or lower quintiles.
So let me ask you a question - why did you pick that a person should have stocks equal to his income? Could some of difference be that you are looking at the individual level (what 1 person should do) while I am looking more at the macro level – what people can do on a aggregated level. Thought experiment. A company has a market cap of 20m, outstanding debts of 80k. The company then issues 10m in bonds for a stock buyback. Now they have a market cap of 10m with outstanding debts of 90k. Did the worth of the company drop in ½? I would say no. (Or they could go the other way and issue equity to pay off the debt.)
Both the equity and bond holders have economic claims to the company’s profits. Different claims but they are both on the capital side of the equation. The mistake that you are making is that you are counting the debt as a liability – but it is an asset for whoever holds the bond. From your perspective does it matter if the capital is held in equity or bonds? You could hold junk bonds that have the same expected return as stocks. And where would you put preferred shares? For this purpose I don’t care – it is all capital.
Looking back we have had 3% growth and we (at the national level) had capital about 4 times our income. Historically, when growth was at 2%, the value of capital was about 8 times that of income. This makes sense. As the spread between required return and growth get narrower the value of future income streams increases. BTW, this is why I chose 8 times. To point is if growth drops to 2% the returns on all investments (both stocks and bonds) as a whole drop by ½. As an individual you can boost your returns and risk by overweighting stocks. A company can lever up by issuing more debt. But society as a whole can’t do that.
Now, back to acquiring said capital. Assume you invest X dollars a year at Y rate for 20 years. Run the numbers. At some point compound interest is going to kick in at your portfolio is going to really take off. Now, slash your rate or return by ½. Your growth is going to look a lot bleaker.
On the ownership society - It is something which I fully back. But if growth slows it will be harder for the average person to achieve it. In the past, lower GNP growth meant more concentration of the wealth at the top. That is my concern.
I think you are ½ right but I am worried that you are ½ wrong.
I am concerned about a permanent shift. I am concerned that we are facing a permanent drop in GDP growth from 3% to 2% which implies wealth (capital) will become more concentrated. (FYI it also implies that you should have 8 times the capital to your wage.) I fear that IT is allowing the elites to leverage their skills resulting in a hollowing out of the middle class. These are larger, slower trends then the current recession but I fear it marks the turning point.
And I think you are slightly off base with the stock thing. Companies can manipulate the value of their stock by manipulating their leverage. i.e. a company can drop their market cap by taking out a loan and doing a stock buyback. I would think enterprise value, stock + debt, would be a better measure.
You are right about corporate debt – except that the amount of cash being horded by companies today, as a percentage of their assets, is much higher than at the same point in other recessions. A rainy day fund is one thing. CEOs hording cash to further their ends – and not the corporations – is something else. Also, when profits increase the profits tend to be split between the workers and the stockholders (capital). What is interesting is that in this recovery is that much of the gain is being captured by capital – much higher than it has been either historical or when exiting a rescission.
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Fair point – I slightly misread the OP.
That being said, when I read the tea leaves I see the PC market as stagnant, not shrinking. (Most people who want a PC have a PC, but there is some room for growth. So you are mostly looking at replacement sales, and I can’t think of anybody who has replaced their PC with a tablet.). You can make a decent steady profit in a mature market dominated by commodity products, but it takes different business plan than a growing, dynamic market.
We might be splitting hairs but Lenovo’s official headquarters is in North Carolina. That is, when Lenovo has to list it’s physical address, it lists NC. Which in and of itself is limited information. There are some companies where the headquarters is just a small rump part of the larger company.
There is also the country of domical, used for taxes, IIRC is China. And then there is the country of risk, which is where the 3 major centers come in.
The reason why I am pointing out that the headquarters are in NC is that it implies that there are Americans in high positions. Maybe not the top and maybe not the dominate positions, but still positions of power. It implies that NC is something more than a low end, low value assembly shop or that Lenovo is transferring out knowledge wholesale, hollowing it out, and then shutting it down.
As somebody who supports free trade we are going to see more cases like this. Lenovo raises some concerns, but these are the typical concerns of increased foreign trade. There are other companies, such as Hewitt, which gives me pause. Hewitt is a very closed and murky company.
IIRC Lenovo is headquartered in the US and just opened another plant for PCs in the south. I don’t want to dismiss all of the concerns but let us try to put this in perspective.
Really? Where are you getting your information from?
IIRC, last year Lenovo was gaining market share. (This was back when Dell was trying to take Dell inc. private, one of the reasons was that Dell was losing market share to Lenovo and HP.)
We're assuming the supply is fixed (as with Bitcoin in the long run),
Let's not. We can assume that the amount of currency is fixed – not the amount of money – that was the thrust of my argument. If you did not like the examples above let me give you another one – fractional banking. When trust is high and the economy is good one can run a bank at a 20 to 1 leverage, so for every 1 dollar of currency I can generate $20 in money (not quite true but it is close enough to the mark). In a recession or a time of crisis I will need to lower my leverage ratio to 10 to 1. Nearly half the money disappears. Don't like the fractional banking system? That fine, there are many historical examples (which are more complex) from the age of the gold system. In good times the money supply expands, in bad times it shrinks – even if the amount of currency is held fixed.
Deflation is often blamed, but the only real correlation is the American Great Depression
Actually I can come up with many examples from when countries where on the gold standard. The 19th and early 20th century is littered with them. 3 financial crisis in America between 1870 to 1910. England in the interwar era. But that is off the point – I can find many examples where GNP is going one way and deflation is going a different way.
On the investment side we may be talking past each other. You can't invest in the “average return” of America, and “required return” has inflation factored in so less of a concern there. Then there are the pension funds, which control a vast amount of funds, which are not interested in getting a average return. The pension contracts specific a required rate and the insurance companies try to reach that rate with the minimum amount of risk.
I am going to recommend 2 books. Lords of Finance by Liaquat Ahamed. Or A Monetary History of the United States, 1867-1960 by Milton Friedman. The first is a light popular historical bit about the creation of central banks. The 2nd is a bit more weighty.
Actually, as deflation increases nominal interest rates fall. Real rates might rise – or maybe not – it depends. .As for borrowing, we all borrow even if it is from our future self. You need to factor in the opportunity costs. What you say for houses also goes for investments in plant and equipment for companies.
Here may be a better example. If real rates go up this means borrow to pay for your education goes up. Yes, one could delay college for 5 years to save up money, but then you spend 5 years of you life in a lower skill lower pay job. On average it is better for you to take the loan and complete your education early.
Mortgages use simply interest. Take the balance of the loan, multiple by the interest rate, divided by 365, multiple by the days in the period. If you incur a late fee that late fee is not added to the balance of the loan. You are not charged interest on interest.
What you want to look for is some type of loan where the payments are less than the interest and the interest can be charged on the prior interest. There are Payment-In-Kind (PIK) bonds but those are rare. Rolling over unsecured debt (credit cards, pay day loans) would not technically qualify since they are new loans but would have the same effect.
Why are we disagreeing? I am saying skewing, you are saying exacerbating. Can we split the difference and agree that it is something bad?
Probably so. On the other hand the knowledge of all that untapped money could motivate more businesses to spend more resources on coming up with ways to increase real returns to 11%.
No, it would not. Consider it a drag force. If I put a parachute on the back of every new car can I make the argument that this will encourage engineers that much more to design a more efficient car? No. They are striving to make a more efficient car today.
By “savings” I mean holding onto cash – we are not talking about investing in the future. For consumption, health care, research and education are all things we consume and are part of GNP. If you increase spending on those 3 you will increase GNP. Where are we going to get the resources to pay for this? If you want to argue against ramped consumerism you can but that is a different argument then growing GNP.
Are you trying to argue that we should advocate policies that benefit the wealthy over the rest of society because it is inevitable? Have you lost all hope? At the very lest you have gained the knowledge of how you are being screwed over.
And no, we need more productive assets. Real productive assets don’t require much energy. Building a wind farm, making a movie, engaging in R&D – these are all real productive assets. “Real” is not being used to describe a physical item but something that has economic value. i.e. things that move the ball forward.
Financial assets are debts that people owe. Think government bonds. (and no matter how many government bonds are purchased, it is not going to move the economy much). Mortgages on newly built McMansion. i.e. trading paper.
Interest rate = real interest rate + inflation. As inflation falls the real interest rate increases. Why? Because now you not only have to pay interest but pay it with more valuable dollars. A double whammy.
You mean like right now where they live off of the interest and investments already.
No, it would be worse. Let’s not give more to the wealthy.
As to the middle man argument – that is something completely different. My points were on deflation alone. That being said, Money transfer is the most positive aspect of BitCoin in my opinion. However I don’t think it outweighs the negatives of deflation. I think reform needs to happen but I don’t think it is going to come from this comer.
(And why are you paying compound interest? I have never seen a loan like that.)
Expected deflation of 10% means that the economy is growing by 10%. The average rate of return, therefore, is 10%
Not necessary. Inflation is driven by the change in the supply of money against the demand for money. Don’t assume that currency is money or that the demand for money is fixed. In fact the demand for money is only loosely associated with GNP. Deflation is often associated with recessions. When a recession hits people tend to flock to safe assets like cash pushing up demand. At the same time the recession can prick the bubble on money and “near money” assets, decreasing the supply of money.
Take a look at the most recent finical crisis. Demand for money was low because people could tap their home equity via HELOC. Banks only held 4% of their assets in cash. Post crisis people can’t tap their home equity and banks need to raise their cash position to 8%. Also, post crisis, the central banks have been flooding the market with money yet inflation barely budges. Check out this graph where you can see the Fed dumping money into the economy and only having a modest impact on the money supply.
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The only reason to invest in some specific venture (apart from being forced into it via inflationary monetary policies) is that you think you can do better than the average rate of return.
No, the reason why you invest in a venture is because the projected risk adjusted returns are higher than your required return. Personally I am very happy investing in index mutual funds that are designed to return the average rake of the market.
Read the formula again: Real Return = Nominal Return – Inflation. Input different numbers and see what you come up with. If real returns are 10% what would your mixture of investment, savings (holding cash), and consumption? If real returns were 5% what would your mixture be? The higher deflation is the lower real rates of return are, the lower the real rates the lower are the new investments.
Historically people have invested less under deflation. Investments tend to skew towards shorter term projects. Financial assets are favored over productive assets.
To the point of expanding your business – you don’t have to expand your business, or maybe you don’t expand it as much. You nailed it on the head that deflation reduces the real returns to the investor. Carry forward that idea. What would you do if real returns are 10% and you have $100 in your pocket, what mixture of investment, savings, and consumption would you do? If deflation was running at 1%, dropping real returns to 9%, what mixture would you do? Invest less, save more, and delay consumption.
I did another post further down this article. Read up on it for the details but it does not exactly work out like that. In a inflationary environment there is an incentive to spend your cash and invest and invest in productive assets. In deflation the scales are tipped the other way – there is a incentive to invest is safe low risk financial assets.
If deflation is running at .25% a year, then cash has a .5% advantage. With lower real returns there will be less investment in risky investments like restaurant.
And to build out on this further – do we really want to reward people who have already made their fortune? Should we favor the banker over the entrepreneur who needs a loan to expand their business? If we are going to tip the scales should we not favor those who will be making the fortunes of tomorrow?
No, deflation discourages productive and risky investment and encourages holding short term low risk cash assets. Real Return = Nominal Return – Inflation. As deflation (negative inflation) increases the real return falls.
Let us use big numbers to illustrate this point. You can invest in a new business and get a 10% real return. You expect deflation to be 10%. If you invest $100 you wind up with $99 at the end (100*1.1*(1-.1)), but you are better off in real terms by $9. Or you could burry your cash. At the end of the period you would have exactly the same $100, but you would be better off by $10. Better not to invest.
Deflation tends to be lower, between 1% to .3%. But that will tip the scale away from large low risk capital intensive projects. Don’t look at the Great Depression. Look at America between 1870 to 1910. Deflation average about .3%. Lots of financial crisis, power tipping towards the banks and wealthy, lower investment rates.
It is not good for the individual – it depending on who the individual is.
It is good for the individual who has the currency. They gain wealth by sitting back and doing nothing. People who tend to have large net positions tend to be the wealthy and banks.
It is bad for those individuals who don’t have the currency or has a negative position – like a loan.
Except the problem with deflation is not the ability to make change. Any currency can be broken down into smaller units. ½ penny. Farthing. Groat. Etc. We could always coin a milodollar.
The problem with deflation is that it increase the value of the currency and thus transfers wealth to those who hold the currency. The wealthy tend to hold the large net positions of cash so they tend to benefit the most. It favors investments in financial instruments over real productive assets. It also tends to drive up the real interest rates for those who are borrowing.
There is a difference between “prototype”, which implies a experiential design that might be refined and moved into production someday and “custom, bespoke”, where one takes true and tried engineering principles and push them to the extremes.
F1 today tends to fall into the latter category today. For example, the bodies use a lot of carbon fiber. The reason we don’t see a lot of carbon fiber into today’s production car is not because of engineering concerns (we know it works) but because of cost.
D-Wave falls into the first category. Does this particular implantation work? Can it be refined to work better? Or does a different approach to quantum computing need to be tried?
There is a difference in having a adventurous youth, making a poor judgment on occasion, and a deliberate plan that too months to execute.
On one had we have things like the “ILOVEYOU” virus – that I am somewhat lenient on and would fall into what you are suggesting. This Russian teen seemed to have a more thought out plan.
Alas, it is Alas, it is a sirens trap. At the end of the USSR their engineers were great at reverse engineering technology but not so good at inviting stuff.
Today why build something good, solid, legitimate that can take on the west? Because of the kleptocracy of the state. I mean yes, it is a form of economic warfare, and it may win battles but it is destine to lose the war.
Well, I guess my confession is that I am assuming that the correct measurement of education spending is per student not absolute levels. i.e., if the number of students increased by 20% but spending increased 10% I would consider that a cut in spending because we are spending less per student.
If spending levels are held constant, and students transfer to charter schools which are paid at a lower rate than public schools (because public schools get the sweetener of capital spending that charter schools do not.) then mathematically we know that while the absolute dollars going to public schools is declining the per student dollars must be increasing.
Can you tell me your reasoning why absolute dollars is a better way to meaure?
How does charter schools take money away from public schools?
In all the states that I know about, charter schools get paid less than public school per student. They are paid the same for daily operations but charter schools don’t get paid for capital costs. That is, public schools building costs are paid out of a separate bucket – charter schools need to pay for their facilities out of operation costs.
This means every student put in charter schools leaves more money for the public schools. If you want to argue that charter schools are cherry picking the best / low cost students, once again all of the states that I know of require charter schools to take in the higher cost / special needs / disable kids as well.
The rule is: Assets = Liability + Equity.
I think some of our difference comes down to what a company is worth (assets) vs. ownership (equity). I will stand on the point that if you hold bonds (liability) you hold capital in the company, and this thread was kicked off on people holding capital.
As to your points, we may be talking about semantics. Banks constantly play around with this number, trying to be as leveraged as the regulators will allow. This is what private equity does all of the time. And CFOs do it all of the time – even if they don’t do a press release.
Cash comes into a firm. It can be saved, invested, paid out as dividends, used for stock buy backs, or used to buy down debt. Does it matter if it is explicated stated? Because I can find examples pre crisis where this occurred. Is there a difference between a company that uses its cash for a stock buyback and loans for future investments or a company that uses a loan for a stock buyback and cash for investments? CFOs play with this all of the time. In the 80s they levered up with loans. In the 90s they levered up with stock buy backs. Making 5% of the equity go away may seem minor to you. IIRC stock buy backs has removed almost 20% of the stock from the market in the 10 years prior to the crisis. I can find some companies that made 40% of their stock go away over 5 years.
BTW, companies do not exchange stock for bonds when they are in desperate situations. In desperate situations they are looking for fresh capital, not to convert equity to liabilities to leverage up the returns because it also leverages up the risk. And I have not heard of a case where a company exchanges stock for a bond and a “less valuable share”. If you have an example I would like to hear it.
I think what you are talking about are warrants. Warrants are stock options that are attached to a bond as a sweetener to lower the coupon rate. They tended to be issued by companies in distress to get a favorable rate. Warrants may have gone away but they have been replaced by convertible bonds, and convertible bonds are still very popular.
Socialism is not the answer, but market structure does matter. The “New Normal” theory suggest that the new rate of growth will be at 2%. Labor’s share has dropped from a high of 60% in the 1950s to 55% and the trend line continues to point down. This implies more inequity. Moderate inequity is good – it drives the system. If long term growth hits 2%, this implies that labor will revert to the historical average of 40%, and this implies huge inequity. People at the top of the heap are there because they were born at the top of the heap or they won the lottery. How do we keep labor’s percentage up? Not by the heavy hand of the state – which is where tax reform and education come into play.
And my link to the "New Normal" - I like Bill Gross's writting.
http://www.pimco.com/EN/Insights/Pages/Gross%20Sept%20On%20the%20Course%20to%20a%20New%20Normal.aspx
I am not sure if I am selling anything. Well, maybe tax reform to simplify the code and improving our school system, in particular at the primary level. And then there is this, the upper end if sprinting a lot faster than the middle or lower quintiles.
http://www.cbo.gov/publication/42729
So let me ask you a question - why did you pick that a person should have stocks equal to his income? Could some of difference be that you are looking at the individual level (what 1 person should do) while I am looking more at the macro level – what people can do on a aggregated level.
Thought experiment. A company has a market cap of 20m, outstanding debts of 80k. The company then issues 10m in bonds for a stock buyback. Now they have a market cap of 10m with outstanding debts of 90k. Did the worth of the company drop in ½? I would say no. (Or they could go the other way and issue equity to pay off the debt.)
Both the equity and bond holders have economic claims to the company’s profits. Different claims but they are both on the capital side of the equation. The mistake that you are making is that you are counting the debt as a liability – but it is an asset for whoever holds the bond. From your perspective does it matter if the capital is held in equity or bonds? You could hold junk bonds that have the same expected return as stocks. And where would you put preferred shares? For this purpose I don’t care – it is all capital.
Looking back we have had 3% growth and we (at the national level) had capital about 4 times our income. Historically, when growth was at 2%, the value of capital was about 8 times that of income. This makes sense. As the spread between required return and growth get narrower the value of future income streams increases. BTW, this is why I chose 8 times. To point is if growth drops to 2% the returns on all investments (both stocks and bonds) as a whole drop by ½. As an individual you can boost your returns and risk by overweighting stocks. A company can lever up by issuing more debt. But society as a whole can’t do that.
Now, back to acquiring said capital. Assume you invest X dollars a year at Y rate for 20 years. Run the numbers. At some point compound interest is going to kick in at your portfolio is going to really take off. Now, slash your rate or return by ½. Your growth is going to look a lot bleaker.
On the ownership society - It is something which I fully back. But if growth slows it will be harder for the average person to achieve it. In the past, lower GNP growth meant more concentration of the wealth at the top. That is my concern.
I think you are ½ right but I am worried that you are ½ wrong.
I am concerned about a permanent shift. I am concerned that we are facing a permanent drop in GDP growth from 3% to 2% which implies wealth (capital) will become more concentrated. (FYI it also implies that you should have 8 times the capital to your wage.) I fear that IT is allowing the elites to leverage their skills resulting in a hollowing out of the middle class. These are larger, slower trends then the current recession but I fear it marks the turning point.
And I think you are slightly off base with the stock thing. Companies can manipulate the value of their stock by manipulating their leverage. i.e. a company can drop their market cap by taking out a loan and doing a stock buyback. I would think enterprise value, stock + debt, would be a better measure.
I think you are missing the point.
You are right about corporate debt – except that the amount of cash being horded by companies today, as a percentage of their assets, is much higher than at the same point in other recessions. A rainy day fund is one thing. CEOs hording cash to further their ends – and not the corporations – is something else.
Also, when profits increase the profits tend to be split between the workers and the stockholders (capital). What is interesting is that in this recovery is that much of the gain is being captured by capital – much higher than it has been either historical or when exiting a rescission.