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torontosimpleguy
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The most foolish theorem ever...

February 4th, 2010, 3:03 pm

Analogy: M&M said that car and horse are the same (without mentioning time at all). I said they are not. In the long run horse will tire and car will not.
 
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Traden4Alpha
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The most foolish theorem ever...

February 4th, 2010, 3:19 pm

QuoteOriginally posted by: torontosimpleguyQuoteOriginally posted by: Traden4Alphatorontosimpleguy, [...]We all seem to be circling around the same core issue of the vast discrepancy between the academic conception of capital [...] versus the empirical reality [...]Nope, I have a theoretical issue with M&M.They equated debt and equity in their results. I said it was theoretically wrong. Debt has an exponential nature whereas equity (or retained earnings in that sense) can't have exponential nature in the long run. Otherwise earnings will overgrow all money existing in the world (and showed that fact with a simple mathematical example).Indeed! And yet equity also has an exponential nature. Don't equity investors expect exponential returns on their investment n the same way that debt investors do? In fact, in exchange for having no contractual claims on the assets of the corporation, don't equity investors expect a notably higher rate of exponential returns?The same process bounds the exponential nature of expected returns on both debt and equity -- bankruptcy. Moreover, causal connections in macroeconomics means that the same factors that induce shortfalls in operating results (leading to bankruptcy) will also induce low valuations of assets and illiquidity (exacerbating the probability of bankruptcy and degrading recovery in the event of bankruptcy).To me, the real paradox is the non-zero long-term rate of growth of the aggregate economy (both in total and per capita) in contrast to zero long-term rate of growth of any particular entity (the birth-death cycle that creates zero total return on any given investment). It's almost as if there is a diffusion process by which the growth of an entity spreads into the broader economy more strongly than does the demise of that entity. That is, the economy grows in proportion to the growth of an individual company. And yet the economy does no shrink in the same proportion with the shrinkage of an individual company. This paradox seems to be tied to the near-monotonic accumulation of knowledge. A new firm creates new knowledge, generates profits on that knowledge, and generates broader economic growth. But when the company dies, some significant fraction of the generated knowledge is retained, not lost, with the loss of the company. To me, this illustrates one the great failings of accounting (and, by extension MMT), which focuses too much on tangible assets. Yes, tangible assets may be easy to measure (this the drunk-looking-for-his-keys-under-the-light-post problem), but assets represent a declining fraction of both the wealth and wealth-generating power of both firms and countries.
 
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torontosimpleguy
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The most foolish theorem ever...

February 4th, 2010, 3:35 pm

QuoteOriginally posted by: Traden4AlphaAnd yet equity also has an exponential nature. Don't equity investors expect exponential returns on their investment n the same way that debt investors do?They can expect whatever they want. Debt objectively has exponential nature (in contractual sense). Equity imaginarily has exponential nature (according to investors' desire).The rest of your post I don't comment (as not related to the issue in question IMHO).
 
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Traden4Alpha
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The most foolish theorem ever...

February 4th, 2010, 4:07 pm

QuoteOriginally posted by: torontosimpleguyQuoteOriginally posted by: Traden4AlphaAnd yet equity also has an exponential nature. Don't equity investors expect exponential returns on their investment n the same way that debt investors do?They can expect whatever they want. Debt objectively has exponential nature (in contractual sense). Equity imaginarily has exponential nature (according to investors' desire).LOL! So P(Contract==Fulfilled) = 1.000000000? A contract may set expectations, but it is NOT an objectively true. Everyone (who isn't an utter fool or a AAA MBS buyer) knows that any contract comes with a probability of breech. Although debt lenders may have a higher probability of experiencing their expected exponential outcomes than do equity buyers, they still have a non-trivial subjective chance of earning less than positive exponential returns.Here's the deeper flaw in the notion of debt=contract=objective. Sometimes the borrower is forced into breech by "unexpected" external conditions (Force Majeure, natural catastrophe, economic recession, etc.). Sometimes the borrower breeches due to expectations on their return on equity (i.e. the borrower expected exponential returns on equity at a rate higher than the contractual returns to the lender). Sometimes the borrower is a fraud. The point is that borrowers make promises that can't (or won't) keep. (Think about that when you think about Greek or US sovereign debt!)Returns on debt is far more subjective than the academics would like to think.
 
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torontosimpleguy
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The most foolish theorem ever...

February 4th, 2010, 4:25 pm

QuoteOriginally posted by: Traden4AlphaA contract may set expectations, but it is NOT an objectively true.We (at least me personally) are talking about theoretical implications of M&M "theory." So, in theory contracts are fulfilled. But expectations are always just expectations.The whole my goal was to show that M&M theory is flawed since it doesn't talk about time horizons in servicing the debt. And (taking into account the exponential nature of debt) this is completely "foolish."
 
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Traden4Alpha
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The most foolish theorem ever...

February 4th, 2010, 4:56 pm

QuoteOriginally posted by: torontosimpleguyQuoteOriginally posted by: Traden4AlphaA contract may set expectations, but it is NOT an objectively true.We (at least me personally) are talking about theoretical implications of M&M "theory." So, in theory contracts are fulfilled. But expectations are always just expectations.The whole my goal was to show that M&M theory is flawed since it doesn't talk about time horizons in servicing the debt. And (taking into account the exponential nature of debt) this is completely "foolish."Yes, and, "in theory" aggregate economies grow exponentially. The problems with the exponential nature of debt aren't qualitative, they are quantitative. If we assume that long-term real returns on debt are no greater than 100% of the long-term real rate of economic growth, then a given debt never grows boundlessly in a given economy. (Note: one can look at this as the debt version of the rationale for indexing. In the long-run the best you can do on returns-on-equity is to match the market index (any index-beating equity will grow to dominate the index). In the long-run, the best you can do on returns-on-debt is to match the broader economy (any economy-beating debt will grow to dominate the economy).In any case, the "in theory" form of the equation can stay the same as long as the parameters are numerically bounded.
 
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torontosimpleguy
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The most foolish theorem ever...

February 4th, 2010, 5:09 pm

QuoteOriginally posted by: Traden4AlphaYes, and, "in theory" aggregate economies grow exponentially.It is maybe in your "theory" but not in mine. P.S. But I don't want to discuss my "theory" here.
 
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list
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The most foolish theorem ever...

February 4th, 2010, 6:00 pm

MMT does not specify any “economies grow exponentially” or something like this. It states that cost of a company depends on sum Equity+Debt but not on E, D themselves. This is formally can be rejected if one introduces an example that does not make sense and satisfy conditions which are sufficient for MMT be true. The common practice of rating agencies could give such examples. But it is against the common sense. For example no one will pay for the brand new car and the same car with break down for say $500 to fix the same price. If a buyer occur be convinced to pay the same price it is only happened when he does not correctly interpret the notion ‘piece’.
 
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torontosimpleguy
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The most foolish theorem ever...

February 4th, 2010, 6:15 pm

QuoteOriginally posted by: listMMT does not specify any “economies grow exponentially” or something like this.Yup, actually I agree with you. M&M theory needs additional assumption: Debt and Equity have exactly the same rate of returns. Then their "theorem" holds.
 
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list
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The most foolish theorem ever...

February 4th, 2010, 6:29 pm

It might be more resonable to start with the company price. Or how does the price is formed based on some given formal assumptions that specify the problem setting.
 
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torontosimpleguy
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The most foolish theorem ever...

February 4th, 2010, 7:04 pm

QuoteOriginally posted by: listIt might be more resonable to start with the company price. Or how does the price is formed based on some given formal assumptions that specify the problem setting.It's pretty difficult task to do it properly.
 
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daveangel
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The most foolish theorem ever...

February 4th, 2010, 7:10 pm

Quote For example no one will pay for the brand new car and the same car with break down for say $500 to fix the same price. If a buyer occur be convinced to pay the same price it is only happened when he does not correctly interpret the notion ‘piece’.this is just pure nonsense. i don't think M&M would say that they are the same. look at the balance sheet. for car 1Car = deposit + borrowingfor car 2car + warranty = deposit + borrowingthe "enterprise value" ie the value of the asset is not the same.
knowledge comes, wisdom lingers
 
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torontosimpleguy
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The most foolish theorem ever...

February 4th, 2010, 7:21 pm

QuoteOriginally posted by: daveangelQuote For example no one will pay for the brand new car and the same car with break down for say $500 to fix the same price. If a buyer occur be convinced to pay the same price it is only happened when he does not correctly interpret the notion ‘piece’.this is just pure nonsense. i don't think M&M would say that they are the same. look at the balance sheet. for car 1Car = deposit + borrowingfor car 2car + warranty = deposit + borrowingthe "enterprise value" ie the value of the asset is not the same.No, he is saying different things.One car,Car1 = deposit + borrowingAnother car,Car2 = deposit + borrowing + ($500 - $broken_breaks)So, price Car1 > price Car2 since breaks are broken and fixed.
 
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daveangel
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The most foolish theorem ever...

February 4th, 2010, 7:24 pm

QuoteOriginally posted by: torontosimpleguyQuoteOriginally posted by: daveangelQuote For example no one will pay for the brand new car and the same car with break down for say $500 to fix the same price. If a buyer occur be convinced to pay the same price it is only happened when he does not correctly interpret the notion ‘piece’.this is just pure nonsense. i don't think M&M would say that they are the same. look at the balance sheet. for car 1Car = deposit + borrowingfor car 2car + warranty = deposit + borrowingthe "enterprise value" ie the value of the asset is not the same.No, he is saying different things.One car,Car1 = deposit + borrowingAnother car,Car2 = deposit + borrowing + ($500 - $broken_breaks)So, price Car1 > price Car2 since breaks are broken and fixed.move the warranty to the LHS ... I see no difference. any extra you pay will be for the warranty and not the car.
knowledge comes, wisdom lingers
 
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torontosimpleguy
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The most foolish theorem ever...

February 4th, 2010, 7:45 pm

QuoteOriginally posted by: daveangelmove the warranty to the LHS ... I see no difference. any extra you pay will be for the warranty and not the car.1. Let's forget about warranty for a second.He says that car with broken and fixed breaks values less than new one.It's a reasonable assumption.2. Now with warranty.New car with warranty still values more than "fixed" car with warranty though warranty covers the cost of future repairs.=========================================But his question goes into definition of price. I don't think it's relevant here.