The Only Way is UP!

cells

Another argument I have seen which makes logical sense to me*.

at a fixed real rate of return, say for arguments sake 5%, as the world builds out capital every single year the economy becomes more capital and less labour. given enough time we go towards an economy that is almost fully capital and labour has no value. That cant work. The only way to fix that is for the return on capital to continuously fall as capital is built up.

Mistermeaner

cells wrote: »

So many things, but the most recent change has been the internet the digital age so lets go with that (globalization and world trade and investment booming was about the same time so maybe put both in the same basket)



Companies have finite lives. If interest rates were zero a company returning £1 billion a year with an expected life of 30 years will be worth £30 billion minus some percentage for further risk.




It isnt bad at al

Companies do not have finite lives and are not valued on that basis

As a rule of thumb a company is worth approx 6-10 EBITDA, if by return you mean EBITDA your company would be worth 6-10 billion ish (depending on lots of stuff)

In other words it will provide a return of 10-15% on your capital

This capital is normally borrowed so if you were able to raise your 10bil by selling bonds with a 5% return you could personally return 5-10%

cells

Mistermeaner wrote: »

Companies do not have finite lives and are not valued on that basis

As a rule of thumb a company is worth approx 6-10 EBITDA, if by return you mean EBITDA your company would be worth 6-10 billion ish (depending on lots of stuff)

In other words it will provide a return of 10-15% on your capital

This capital is normally borrowed so if you were able to raise your 10bil by selling bonds with a 5% return you could personally return 5-10%

all companies have finite lives even the earth has a finite life

the argument generali put forward was that if rates went to zero shares with a return would have a infinite value which they would not even if a zero rate world as companies dont last forever

Mistermeaner

Most companies do last forever - sure names change and they are divested , merge , separate, get absorbed etc but the value within them does not generally 'disappear'

Your point is flawed as it is not how the world works

mwpt

Generali wrote: »

So what changed? Real interest rates haven't been zero for centuries so why would they be now?

Because in a debt based growth system debt chases debt. A government which decides to buck the trend and exposes the naked emperor won't be a government much longer? When the market knows there is a buyer of last resort which doesn't want rates to rise, we don't really get price discovery?

Of course, that could be wrong, I don't really understand the cells theory of NIRP.

cells

Mistermeaner wrote: »

Most companies do last forever - sure names change and they are divested , merge , separate, get absorbed etc but the value within them does not generally 'disappear'

Your point is flawed as it is not how the world works

well when the first company makes it to forever let me know

cells

mwpt wrote: »

Of course, that could be wrong, I don't really understand the cells theory of NIRP.

A portion of the economy is labour and a portion capital. I think its about 30% 70% at the moment or something like that. So 30% of the economy is returns on investment things like rents on homes, offices, land, returns on business investments eg companies etc.

As time passes more capital is produced. If the returns were about static say 5% a year then as capital is increasing it will take up more and more of the economy.

Given enough time the economy would go towards almost all capital returns and no labour. Clearly that cant work. So capital returns must diminish as more capital is built out. That is the real rate of return will go down as capital is built out (or capital is used more efficiently) and with time both happen. The result has been the best part of 25 years of falling rates

Mistermeaner

cells wrote: »

well when the first company makes it to forever let me know

Your method of valuing companies is incorrect

Generali

cells wrote: »

So many things, but the most recent change has been the internet the digital age so lets go with that (globalization and world trade and investment booming was about the same time so maybe put both in the same basket)



Companies have finite lives. If interest rates were zero a company returning £1 billion a year with an expected life of 30 years will be worth £30 billion minus some percentage for further risk.




It isnt bad at all

---

Anyway we have had this discussion before and you dont seem to want to know. You can not have a positive real rate of return in a system with a long life expectancy.

Go back to your 5% real return. If say country A (eg China) lends country B (eg UK) £1 billion at a real return of 5% a year for 200 years what happens? Well it becomes a real debt of over £17,000 billion which is about 10 x GDP

On the other hand look at the current gilt rate of 1.2% while inflation is about 0.3%. Lets just say 1% real return to give it a round number. 1% return over 200 years takes the £1 billion debt to £7 billion. Still a lot more than the original debt but within the bounds of possible to pay and service unlike the impossible 5% real return £1 billion going to £17 trillion.

Yes cells, you are absolutely right. If you invent a bunch of numbers then it's not possible for interest rates to be an arbitrary number that you plucked out of the air.

Back in the world that we live in, if nominal interest rates are about the same as nominal GDP growth then the debt can be serviced perfectly well at an economy level.

As an example, currently inflation (RPI) is 1.3% and real growth is 1.7% which would make an interest rate of 3% neutral in the UK.

Interestingly, people have long charged interest despite the holy books of the Abrahamic faiths being quite rude about it. In much the same way people have stolen and had sex with someone other than their life partner and coveted their neighbour's !!! even though Moses wasn't keen on us doing those things. Bca Monte dei Paschi di Sienna has been going for over 500 years so there is quite a long history of usury in Europe.

cells

Generali wrote: »

As an example, currently inflation (RPI) is 1.3% and real growth is 1.7% which would make an interest rate of 3% neutral in the UK.
.

in your example numbers above a 1.7% positive return is sustainable minus risk on investment minus time/cost of making and monitoring said investment minus risk on inflation outlook years ahead minus tax and political risk. None of those risks and costs are zero so the 1.7% 'real' sustainable return in your example is surely lower than the headline 1.7% return

I will still maintain that real rates of return will fall towards 0.
Its also noteworthy that the UK 10 year gilt is at 1.25% nominal so negative 0.05% real return with your 1.3% RPI figure. 10 years ago you would probably have said this was impossible


Going a further level into technology and the future there are various other factors which might take real returns negative within the next generation possibly strongly negative. AI or even near AI being one possible reason why real returns could go negative. I thought about writing that this is a low probability even but the scientist in me is saying no its not low probability its a guaranteed event we just dont know the time frame but if moores laws holds up it looks possible within my lifetime.