The Next Nail in the Coffin

Generali

cells wrote: »

Think logically. Is there no value on the latter half of infrastructure that lasts 50-100 years? That's what high rates entice the economy to believe.

NPV is just sums though and it's not the infrastructure that has no value it's the monetary value of it today.

In many ways that makes sense using your logic: a bridge in 100 years has nil value to me as I will almost certainly be dead.

westernpromise

michaels wrote: »

Doesn't that maths only work if you assume rent payments are costant in nominal terms. If they increase at the same rate per annum as the discount rate applied then won't each year of rent have the same value today?

I don't think so. One normally ignores inflation in an NPV calculation because it applies to both sides of the calculation and / or is subsumed in the discount rate.

The discount rate itself is more usually cost of money over inflation.

cells wrote:

Is there no value on the latter half of infrastructure that lasts 50-100 years? That's what high rates entice the economy to believe.

AIUI there is a field called Real Options which looks at this sort of thing. A commercial building has to pay for itself over x years but will stand for 2x or even 3x years, so clearly it has a residual value at the end of the initial cashflow period even if it was £0 at its start.

The ancients clearly had no grasp of economics. They built things like the Coliseum and cathedrals and whatnot that stood for centuries but were paid for in decades. Clearly very over-specified.

cells

Generali wrote: »

NPV is just sums though and it's not the infrastructure that has no value it's the monetary value of it today.

In many ways that makes sense using your logic: a bridge in 100 years has nil value to me as I will almost certainly be dead.

yes if you think within just one lifetime then things out a few decades are worthless and for much of history people could only think a few years ahead due to various things one of which was wars

As such economies ran on high rates because investing for the future was silly because you didn't know if there was a future to invest in.

As economies developed and institutions and companies with much longer 'loves formed' and people could pass on wealth form generation to generation hen the economy needed lower rates to allow investment further into the future.

cells

Generali wrote: »

NPV is just sums though and it's not the infrastructure that has no value it's the monetary value of it today.

With a high interest rate the NPV makes an economy invest onto into the short term.

Imagine a project to build a bridge with a toll fee to cross it.
We have 3 designs. One costs X one costs more at Y and one more at Z.
X will last 20 years Y will last 60 years and Z will last 200 years.

The decision on which to build will be based on the NPV of the cash flow which will be based on the interest rates in the economy.


With a high enough interest rate, X lasting only 20 years will be built even if Y or Z is just marginally more expensive.

So if we have falling rates, we can invest further and further into the future.


Does that make sense?

Generali

cells wrote: »

yes if you think within just one lifetime then things out a few decades are worthless and for much of history people could only think a few years ahead due to various things one of which was wars

As such economies ran on high rates because investing for the future was silly because you didn't know if there was a future to invest in.

As economies developed and institutions and companies with much longer 'loves formed' and people could pass on wealth form generation to generation hen the economy needed lower rates to allow investment further into the future.

That's just not borne out by the history though. Rates have fluctuated over time not tended towards a low today.

Rates have trended steadily downwards since 1983 but you could just as easily say that there was a steady trend up from 1914 to 1983.

Generali

cells wrote: »

With a high interest rate the NPV makes an economy invest onto into the short term.

Imagine a project to build a bridge with a toll fee to cross it.
We have 3 designs. One costs X one costs more at Y and one more at Z.
X will last 20 years Y will last 60 years and Z will last 200 years.

The decision on which to build will be based on the NPV of the cash flow which will be based on the interest rates in the economy.


With a high enough interest rate, X lasting only 20 years will be built even if Y or Z is just marginally more expensive.

So if we have falling rates, we can invest further and further into the future.


Does that make sense?

I understand the maths but you're still wrong.

westernpromise

Generali wrote: »

That's just not borne out by the history though. Rates have fluctuated over time not tended towards a low today.

Rates have trended steadily downwards since 1983 but you could just as easily say that there was a steady trend up from 1914 to 1983.

To put it another way, base rates have been above 10% for only 20 of the last 300 years, and all 20 were between 1970 and 1995.

This has led some to suppose that "normal" rates are 10%, because that's what they can remember. Actual retail lending rates today, however, are much closer to the 300-year trend than to the 1970-1995 trend, so there is good reason to think that that era was the aberration.

It's partly why I think we aren't even half way through the era of ultra low rates yet: they actually aren't that low at all.

cells

Generali wrote: »

That's just not borne out by the history though. Rates have fluctuated over time not tended towards a low today.

Rates have trended steadily downwards since 1983 but you could just as easily say that there was a steady trend up from 1914 to 1983.

I think there is a cut-off for a lot of things where it makes no sense to look before that to find a trend as other variables and factors are dominant or make the data before said date not only worthless but counter-productive. For instance looking back 400 year ago to the BOE rate when the heights of science was attaching a leech to your arm to cure you of your ills to try and deduce a trend would be silly. Looking at 1914 is also silly we barely had electricity back then

I suppose we could all pick a date and it is open to bias the date that we do pick but I would suggest maybe black Wednesday in 1992 or perhaps the big bang deregulation in 1986 or maybe 1990 as a nice round number


Either way the BOE shows that 1989 to now has been a steady decline. I suppose you could claim the last 25-30 years is too short a time frame to be sure that real rates should fall towards zero we could just be in a blip and maybe that is the case. However if real rates stay low for another 5-10 years it will sure look likely that as economies develop rates tend towards zero

cells

Generali wrote: »

I understand the maths but you're still wrong.

maybe I am. But the point of a discussion board is to discuss things which the above quote does not do


NPV and rates and investments are all linked. As economies advance they have to tend towards zero rates so as to allow/enter the phase of long term developments and investments.

How can an economy invest long term if real rates are 10%?

Generali

cells wrote: »

maybe I am. But the point of a discussion board is to discuss things which the above quote does not do


NPV and rates and investments are all linked. As economies advance they have to tend towards zero rates so as to allow/enter the phase of long term developments and investments.

How can an economy invest long term if real rates are 10%?

Real interest rates can only be 0% if there is no 'liquidity premium', i.e. people have no preference between spending and saving.

The only way that is possible is if people are consuming at such a high level that to consume any more would cause them to be less happy than if they consumed at the current rate.

The only way for your supposition to be close to being true is if people are indifferent between saving and spending. The level of consumer debt says to me that isn't the case.