Time Value of Money

[Flip McWho]

Damn 374 replies. Kid was right, this should go to 500 then.

Seems as if Kid has abandoned it.

He'll be back no doubt.

[Saras]

Originally posted by David Floyd


Seems as if Kid has abandoned it. Oh well. Kind of hard to defend a position that liberals, conservatives, and Libertarians all oppose

More like "hard to defend a position that earth is flat". to new age luddites.

[Dauphin]

Originally posted by Saras
Yea kid, post us a derivation of the Black-Scholes formula how YOU undertand it

I was so very tempted to post the heat equation from physics, which is identical in formulation.

[DAVOUT]

Originally posted by Flip McWho
Yeah its good entertainment, and procrastination too.

I really don't see how the cost of the cow doubles when the cow making didn't change.

The price of cow expressed in tomatoes doubles, but the price of cow expressed in apples does not change (in the absence of productivity improvement of apples growing).

[Saras]

Originally posted by DAVOUT


The price of cow expressed in tomatoes doubles, but the price of cow expressed in apples does not change (in the absence of productivity improvement of apples growing).

don't feed the trolls!

[Saras]

Originally posted by Dauphin


I was so very tempted to post the heat equation from physics, which is identical in formulation.

Really? How come? Frankly, if anyone asked me to post the derivation I'd have to google it - long time since I did it.

[Kidlicious]

I actually had to sleep a little. Now I have to complete an assignment. But I'll be back in awhile.

[Kidlicious]

Originally posted by DAVOUT


The price of cow expressed in tomatoes doubles, but the price of cow expressed in apples does not change (in the absence of productivity improvement of apples growing).

No. There will be less demand for apples because it is a supplemental good to tomatoes.

[Kidlicious]

Originally posted by David Floyd
How is my example tied to value creation? Because it IS! The specialist decided that there was value in the job offer, so he took the job. The company decided there was in value in making the offer, so they made it.

A decision is not a physical act. It does not create things. Look in the Book of Genesis Supply Side Jesus. God decided to create things, and then he actually did create things.

How would measuring the pancakes tell me who made them? Besides, I don't eat breakfast, or at least don't cook breakfast. If I eat it, I go out, and pay a fee in exchange for goods/services, because I see a value in that.

You see value in pancakes. Who makes them is irrelevent. But the person who makes them created them. Duh!

In any case, that's a stupid question. Were I to make pancakes in the morning, the only thing I would care about is whether or not they tasted good. The question is also irrelevant to the topic.

So why again is measuring value relevent to the discussion?

[Kidlicious]

Originally posted by David Floyd
OK, here's your original post about pancakes:



Your work to make pancakes is only possible because you can afford the materials to make pancakes. Further, you're right, you see a value in satisfying your desire. But if the materials for pancakes cost, say, $30, you probably wouldn't see a value in making them, would you? On the other hand, someone who made $2 million/year and loved pancakes probably WOULD see a value in making pancakes for $30 a batch, right?

The point is, you DO see a value in laboring to fulfill your desire, but the labor you will perform to fulfill that desire is different than the labor other people will perform, or the money you will spend to create value is different from the amount others will spend. That's just plain obvious, and it shows that value is created by perception.

No it doesn't. It only shows that people value things differently. That does nothing to create things.

[David Floyd]

A decision is not a physical act. It does not create things.

Decisions can result in creation, but that isn't the point. The point is that there was no value inherent in the job offer, until there was a second party who agreed that the job offer had value.

You see value in pancakes. Who makes them is irrelevent. But the person who makes them created them. Duh!

Of course the person who makes them created them, but they have no value unless someone wants them.

No it doesn't. It only shows that people value things differently. That does nothing to create things.

Without value judgements such as these, nothing would end up being created. But again, that's irrelevant. What IS relevant is that nothing is actually valuable until someone perceives it as valuable.

[Kidlicious]

Originally posted by David Floyd
Decisions can result in creation, but that isn't the point. The point is that there was no value inherent in the job offer, until there was a second party who agreed that the job offer had value.

This is all irrelevent to the value embodied in goods and services.

Of course the person who makes them created them, but they have no value unless someone wants them.

You're repeating someone elses argument. Go forward with it.

[David Floyd]

This is all irrelevent to the value embodied in goods and services.

There IS no inherent value in goods and services! Someone has to first believe they have value for that value to exist.

If you believe otherwise, then tell me the absolute value of a steak dinner or a Honda Civic.

You're repeating someone elses argument. Go forward with it.

I've already gone forward with it, and given multiple examples which you haven't bothered to address. I'm still waiting to see your response to my argument that you already said had nothing wrong with it.

[Kontiki]

I really don't want to get sucked into this, but I'd just like to ask a question that may keep this on the track Kid seems to want it to go. So, to Kid:

How do YOU define value and how do YOU quantify it? What, for example, is the inherent value of an hour of work? Or an apple?

[Kidlicious]

Ok, here's something on Keynesian theory, and as the article states there is emperical evidence to support it.

Fisher’s theory of Time Preference and Keynes’ theory of Liquidity Preference

Fisher and Keynes had, in a sense, a similar approach to the theory of interest rates. The idea behind their argument was the intertemporal relationship of spot-forward swap of money (i.e. swap of money today against money tomorrow). However, they did not have the same exposition of this intertemporal relation (Kregel, 2000). Fisher’s approach relied on “rational tendencies,” whereas Keynes’s approach was based on the idea that uncertainty about the future makes the value of money unstable, which he believed to be the normal case in a capitalist economy (ibid).

The time preference theory is based on a belief that individuals prefer “present goods” to “future goods,” and that the social rate of time preference will determine and be equal to the pure rate of interest in the society (Rothbard, 1987, p.644). Fisher adopted this approach to explain the determination of nominal interest rates, which he believed to be “based on expectations of future goods prices relative to present goods prices as expressed in the expected rate of inflation or deflation of goods prices” (Kregel, 2000).

Kregel (2000) highlighted the fundamental difference between Fisher’s theory of time preference and Keynes’ theory of liquidity preference, as he wrote:

“In Fisher's time preference approach the rate of interest is the discount of future over present income that makes their utility equal at the margin, while for Keynes liquidity preference represents the return that must be paid on illiquid assets to make investors indifferent to holding more liquid assets” (ibid, italics in original).

In fact, Keynes defined the interest rate as the premium that must be paid in order to convince individuals to part from liquid assets and hold illiquid assets. He explicitly argued that:

“The rate of interest at any time, being the reward for parting with liquidity, is a measure of the unwillingness of those who possess money to part with their liquid control over it. The rate of interest is not the “price” which brings into equilibrium the demand for resources to invest with the readiness to abstain from present consumption. It is the “price” which equilibrates the desire to hold wealth in the form of cash with the available quantity of cash” (Keynes, 1936, p.167).

Fisher’s theory of time preference presents a relation between real income streams through time (current and future real incomes). According to Kregel (2000), Fisher recognized that an adjustment for the change in relative prices is necessary in order to allow the transfer of income from the present to the future. Fisher’s relation can be stated as follow: (1+ p) (1+ r) = (1+ i), where p is the rate of inflation, r is the rate of increase in real income and i is the rate of interest on money.

Solving for i we can write: i = r + p + rp, which is equivalent to: i = r + p because rp is a negligible number (ibid). Keynes argued that it is difficult to make sense of Fisher’s relation “because it is not clear whether the change in value of money is or is not assumed to be foreseen” (Keynes, 1936, p. 142). That is, for Fisher’s relation to hold, individuals must have perfect knowledge of the future incomes and prices (Kregel, 2000). Keynes also objected to Fisher’s relation because it overlooks the impact of a change in the interest rate on the capital value of existing stocks of financial assets (ibid). In fact, the change in the rate of interest would have different impact on financial assets of different maturities. That is, financial instruments with longer maturities “should have a larger adjustment in their interest rate to offset the fall in capital value due to the rise in interest rates” (ibid).

Keynes’ critique to Fisher’s relation led him to think about the “breakeven condition” that keeps the capital values unchanged after a change in the rate of interest. This condition is Keynes’ square rule (?p = i2), which states that “for increases in the rate of interest equal to the increase in the rate of inflation to leave capital values unchanged they must be equal to i2 … but this only keeps capital values constant and does not provide any adjustment for inflation” (ibid). So, Fisher’s relation will hold only if ?p> i2, which is not likely to be the case, according to Keynes. Furthermore, empirical studies showed that Keynes argument was correct (ibid).

Interest paid is not compensation for value created at all. It is a premium paid to investors for keeping less liquid investments (choosing bonds over cash). The difference is that it's completely demand led. That is demand for goods and services results in demand for investors to invest in bonds. So investing in bonds doesn't create value.