tag:blogger.com,1999:blog-582368152716771238.post4153707830354126587..comments2024-03-28T11:50:52.581-05:00Comments on The Grumpy Economist: Build back sausageJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger82125tag:blogger.com,1999:blog-582368152716771238.post-82134400883411429412021-11-17T07:30:35.289-06:002021-11-17T07:30:35.289-06:00OEE,
"Read the economic history of Europe an...OEE,<br /><br />"Read the economic history of Europe and Great Britain."<br /><br />Europe and Great Britain were engaged in some type of warfare for the better part of a millenia (many times with each other).<br /><br />https://en.wikipedia.org/wiki/List_of_conflicts_in_Europe<br /><br />I would hope that we as a civilized people would be able to get beyond that.<br /><br />I mean, you do realize the nuttiness of all of this don’t you?<br /><br />We “need” a war to generate inflation.<br />We “need” inflation to avoid deflation.<br />We “need” government bonds to be able to pay for a war.<br /><br />It’s a circular argument.<br /><br />Once you realize that you don’t “need” government bonds (government can sell equity) and that the equity sold by government can be used to offset the real (inflation adjusted) cost of private debt service, then the other “needs” (inflation and war) disappear.<br /><br />Deflation in and of itself is not something that should be frowned upon or discouraged. Yes, it creates problems in credit markets and for central bankers, but those problems can be easily remedied without resorting to war and inflation.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-80981342289377043582021-11-17T00:25:14.931-06:002021-11-17T00:25:14.931-06:00This comment has been removed by the author.Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-89411942100364934582021-11-16T15:55:02.406-06:002021-11-16T15:55:02.406-06:00OEE,
https://en.wikipedia.org/wiki/Humphrey%E2%80...OEE,<br /><br />https://en.wikipedia.org/wiki/Humphrey%E2%80%93Hawkins_Full_Employment_Act<br /><br />"REQUIRES the President to set numerical goals for the economy of the next fiscal year in the Economic Report of the President and to suggest policies that will achieve these goals."FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-45752656722272199662021-11-16T15:47:00.905-06:002021-11-16T15:47:00.905-06:00OEE,
More importantly, 7 of those instances have...OEE,<br /><br />More importantly, 7 of those instances have occurred in the last 20 years (2001, 2008, 2009, 2012, 2013, 2016, and 2020).<br /><br />Please explain the divergence.<br /><br />FRestly, Stephen Williamson's paper "Inflation control--do central bankers have it right? Found at <br /><br />https://research.stlouisfed.org/publications/review/2018/04/16/inflation-control-do-central-bankers-have-it-right<br /><br />"Neo-Fisherites argue that conventional central banking wisdom has inflation control wrong, in that the way to increase (reduce) inflation is to increase (reduce) the central bank’s nominal interest rate target."<br /><br />Steven's model is incomplete. Central bank sets it's interest rate to 0.0001% and lends federal government $1 quadrillion dollars which it turns around and spends on everything. The quantity of bonds (borrowed money) matters just as much as the interest rate.<br /><br />'FRestly, the formula d = 2×TRGDP% - RDGP% is not testable."<br /><br />Sure it is. Try it out and see what happens. Set your target rate of real GDP growth at some number (4%, 6%, 8%), start selling securities with the proposed rate of return, and monitor the results. What you mean to say is that it has never been tried and tested.<br /><br />Flying into outer space was never testable until it was tried and tested.<br />Climbing Mt. Everest was never testable until it was tried and tested.<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-79433640679298194522021-11-16T06:58:31.813-06:002021-11-16T06:58:31.813-06:00This comment has been removed by the author.Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39544752730192207412021-11-15T21:51:39.247-06:002021-11-15T21:51:39.247-06:00This comment has been removed by the author.Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-28870071875571607812021-11-15T20:05:21.821-06:002021-11-15T20:05:21.821-06:00OEE,
"(3) In 2009, the choice financial secu...OEE,<br /><br />"(3) In 2009, the choice financial security was the Treasury bill or Treasury note, acting as a safe haven."<br /><br />That's kind of like saying everybody at the party preferred pretzels over potato chips to snack on, even though potato chips were not served.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-6615904237449568362021-11-15T17:49:51.489-06:002021-11-15T17:49:51.489-06:00OEE,
"(E) Your proposed formula for the disc...OEE,<br /><br />"(E) Your proposed formula for the discount rate d, has some serious issues that you may wish to examine"<br /><br />Agreed, I was trying to match the variables in the Taylor rule.<br /><br />It should be:<br /><br />d = 2 * dY'(t)/Y'(t) - dY(t)/Y(t)<br /><br />Or as above:<br /><br />d = 2×TRGDP% - RDGP%<br /><br />"Conclusion: Dispense with the Taylor Rule, it can only get you into hot water."<br /><br />And what rule or guide is the central bank using today in setting the discount rate that it is willing to lend at? <br /><br />"(2) Deflationary periods are infrequent and are the consequence of errors in judgement by the central bank authorities (1930s and 2007-2008)."<br /><br />Prior to the creation of central banks and credit based money, deflations were quite common.<br /><br />https://www.investopedia.com/ask/answers/040715/were-there-any-periods-major-deflation-us-history.asp<br /><br />"Buoyed by the rise of industrial mechanization after the war, the prices of goods dropped starting in 1817 and continued to drop until 1860. Even though prices were dropping, output grew consistently during this time and continued to grow at the same time that prices were dropping until approximately 1860, at the start of the Civil War."<br /><br />There are two types of deflation - good deflation sparked by increases in productivity that are accompanied by higher real growth and bad deflations associated with depressions.<br /><br />The problem is central banks (and politicians and economists) try to fight both types without understanding the distinction between the two. Hence the need for a fiscal policy rule to marry with a monetary policy rule.<br /><br />"In 2009, the choice financial security was the Treasury bill or Treasury note, acting as a safe haven."<br /><br />Because that was the only choice available?<br /><br />"Conclusion: government equity would not have received an audience."<br /><br />You don't know the audience very well.<br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-11617291771794064012021-11-14T18:38:47.394-06:002021-11-14T18:38:47.394-06:00Corrections
i(t) = pi(t) + r'(t) + alphapi * ...Corrections<br /><br />i(t) = pi(t) + r'(t) + alphapi * ( pi(t) - pi'(t) ) + alphay * ( y(t) - y'(t) )<br /><br />d = Discount rate offered on government equity<br />da = Realized returns on government equity<br /><br />Notice, at any discount rate d offered by Treasury, TR% * Y(t) * P(t) is always greater than or equal to da * EQ(t) because the equity can only be used to fulfill a tax liability (no cash settlement by the Treasury) - Problem #2 solved.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-18889044630898370092021-11-14T11:15:43.092-06:002021-11-14T11:15:43.092-06:00This comment has been removed by the author.Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-6951532551756796032021-11-13T09:18:05.019-06:002021-11-13T09:18:05.019-06:00This comment has been removed by the author.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-21500850199991758102021-11-13T06:48:55.437-06:002021-11-13T06:48:55.437-06:00OEE,
"You haven't given a stable coheren...OEE,<br /><br />"You haven't given a stable coherent definition of the concept..."<br /><br />What part do you not understand? I have tried to explain it as best I could. You asked me to flesh out the details (bones and flesh - remember?) and so I did on the Blog. Then you claim you don't have time to read it.<br /><br />You asked: Who in that mix would establish TRGDP%?"<br /><br />It's already a matter of law: <br /><br />https://en.wikipedia.org/wiki/Humphrey%E2%80%93Hawkins_Full_Employment_Act<br /><br />"REQUIRES the President to set numerical goals for the economy of the next fiscal year in the Economic Report of the President and to suggest policies that will achieve these goals."<br /><br />"FRestly, between 1960 and 2021, the United States has experienced just one year during which the consumer price index recorded a negative value for inflation, i.e., deflation (2009, -0.356%)."<br /><br />And so it did happen, and it happened back in the 1920's and 1930's during the Great Depression - case closed.<br /><br />"It is one thing to discuss economic theory that has at least a modicum of connection with the real economy, and quite another to engage in discussion of an idea that has no connection whatsoever with either theory or practical reality..."<br /><br />Well now that we have established that government equity has an application with regard to real time events that HAVE HAPPENED both fairly recently at an earlier time in US history, perhaps you should just go ahead and read the Blog.<br /><br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-56916932534420434392021-11-11T16:27:15.658-06:002021-11-11T16:27:15.658-06:00FRestly, between 1960 and 2021, the United States ...FRestly, between 1960 and 2021, the United States has experienced just one year during which the consumer price index recorded a negative value for inflation, i.e., deflation (2009, -0.356%).<br /><br />You are putting forward metaphysical examples and purporting that those example 'prove' the efficacy of a concept you refer to as "government equity". Then you have the temerity to ask, "Are you starting to get the picture?" Answer: Yes, I'm getting a picture, FRestly, but it's not the one you want me to get, but it's the one that is coming through loud and clear in your responses.<br /><br />A typical response is "...to increase the real GDP growth rate - dY(t)/Y(t), all that you need to do is hold the nominal GDP growth rate fixed while allowing the price level to fall." Another typical response is, "Allowing prices to fall is problematic for monetary policy and the Taylor rule. Not so, for fiscal policy using government equity."<br /><br />It is one thing to discuss economic theory that has at least a modicum of connection with the real economy, and quite another to engage in discussion of an idea that has no connection whatsoever with either theory or practical reality and likely never will at the rate this discussion is going. You haven't given a stable coherent definition of the concept, and you never will, a.s. In sum, I see little purpose in taking up more of John's editorial time on this topic. I wish you well with whatever you manage to pull together, but as for me, looking forward, further discussion is not worth the candle.Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-4232632407470124062021-11-11T10:55:41.126-06:002021-11-11T10:55:41.126-06:00OEE,
"Regarding the determination of the dis...OEE,<br /><br />"Regarding the determination of the discount rate d, you will want to keep it simple. The more you attempt to tie it to theoretical economic concepts the less likely you to find acceptance of the concept."<br /><br />Did that stop the acceptance of the Taylor rule?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-74933357221779845692021-11-11T10:36:17.077-06:002021-11-11T10:36:17.077-06:00OEE,
"Who determines TRGDP% and how is it de...OEE,<br /><br />"Who determines TRGDP% and how is it determined? The FOMC's dual mandate, in law, is (1) price stability, and (2) full employment."<br /><br />First off, the directive given to the Federal Reserve comes from the following legislation enacted by Congress:<br /><br />https://en.wikipedia.org/wiki/Humphrey%E2%80%93Hawkins_Full_Employment_Act<br /><br />"Mandates that the Board of Governors of the Federal Reserve to establish a monetary policy that maintains long-run growth, minimizes inflation, and promotes price stability."<br /><br />No where in that sentence is "full employment" even mentioned or what would be considered to be "full employment". The Fed has already indicated that their preferred definition of price stability is 2% either way (which they are missing by a long shot). What level of employment to population ratio is considered full employment? Has the Fed (in it's "dual mandate" that you think exists) even given any indication what that ratio should be?<br /><br />"Congress creates the laws (legislation), and the executive branch implements the law, determines foreign policy, and commands the military branches. Who in that mix would establish TRGDP%?"<br /><br />It's already a matter of law: <br /><br />https://en.wikipedia.org/wiki/Humphrey%E2%80%93Hawkins_Full_Employment_Act<br /><br />"REQUIRES the President to set numerical goals for the economy of the next fiscal year in the Economic Report of the President and to suggest policies that will achieve these goals."FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-35233378461644122702021-11-10T02:00:45.328-06:002021-11-10T02:00:45.328-06:00OEE,
Recognize that to increase the real GDP grow...OEE,<br /><br />Recognize that to increase the real GDP growth rate - dY(t)/Y(t), all that you need to do is hold the nominal GDP growth rate fixed while allowing the price level to fall.<br /><br />NGDP(t)% = 2%<br />dP(t)/P(t)= 0%<br />dY(t)/Y(t)=2%<br /><br />NGDP(t)% = 2%<br />dP(t)/P(t)= -3%<br />dY(t)/Y(t)=5%<br /><br />Etcetera, etcetera. Allowing prices to fall is problematic for monetary policy and the Taylor rule. Not so, for fiscal policy using government equity.<br /><br />"FRestly, when you ... can give a stable coherent definition of that concept, we'll take up the discussion again."<br /><br />Are you starting to get the picture?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-44760035173095584712021-11-09T14:33:37.300-06:002021-11-09T14:33:37.300-06:00FRestly, there is no significance to the character...FRestly, there is no significance to the characters "rt" in my previous post. The Android tablet that I used to write that post froze up as I was editing it and wouldn't permit to erase those two remaining characters, hence "rt" as the last two characters in the post.<br /><br />Regarding the determination of the discount rate "d", you will want to keep it simple. The more you attempt to tie it to theoretical economic concepts the less likely you to find acceptance of the concept.<br /><br />For example, yesterday I viewed the discussion between R. Clarida, B. Bernanke, and a representative (can't recall his name) of the ECB. The discussion was moderated by a young woman from Brookings Institute. R. Clarida presented the FOMC case for allowing the rate of inflation to drift, and the case for driving the unemployment rate down to maximize or achieve a state of "full employment" (cf., Chmn. Powell). B. Bernanke argued the risks of letting inflation expectations run away beyond the control of the FOMC. He referred to the neutral rate of interest, etc., in his arguments which recalled the efforts decades ago to control inflation, etc. The discussion was esoteric and only intelligible to those listeners who were well-versed in macroeconomic theory. For the run of the mill businessman, the discussion offered no insights or solutions.<br /><br />Using the associative rule of algebra, d = TRGDP% + (TRGDP% - RDGP%) = (TRGDP% + TRGDP%) - RDGP% = 2×TRGDP% - RDGP%. Is this what you intended?<br /><br />Who determines TRGDP% and how is it determined? The FOMC's dual mandate, in law, is (1) price stability, and (2) full employment.<br /><br />Congress creates the laws (legislation), and the executive branch implements the law, determines foreign policy, and commands the military branches. Who in that mix would establish TRGDP%?<br /><br />You will find that "d" is endogenous, i.e., internal to the economic model. In all likelihood, "d" is a shadow price that drops out of the solution to the optimization problem. In a warehouse stocking problem it is the marginal revenue foregone when the a physical or budgetary constraint become binding on the solution. It is the financial cost of bolted down (physical) capital in the central planner's problem, and the wage rate of labor in that same problem when the labor supply constrant is binding. From the perspective of the secretary of the treasury, it is the opportunity cost of capital.<br /><br />Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-84681206279152540642021-11-08T13:13:31.387-06:002021-11-08T13:13:31.387-06:00OEE / RT,
And even if you don't like using th...OEE / RT,<br /><br />And even if you don't like using the "Real output gap" and "Potential real GDP", then fine set rate of return on government equity to the following:<br /><br />Discount rate (d) on equity sold by Treasury (EQ) is equal to Target real GDP growth rate + ( Target Real GDP growth rate - Current real GDP growth rate ).<br /><br />d = TRGDP% + ( TRGDP% - RDGP% )<br /><br />As RGDP% converges to equal TRGDP%, the discount falls (risk becomes more expensive to purchase).<br /><br />As RGDP% diverges from TRGDP%, the discount rises (risk becomes less expensive to purchase).<br /><br />I only used the output gap and potential real GDP to create a "Taylor like" rule regarding equity sold by Treasury.<br /><br />Finally, regarding targeting the real GDP growth rate, I believe a bunch of economists tried and failed regarding that:<br /><br />https://www.amazon.com/4-Solution-Unleashing-Economic-America/dp/0307986144<br /><br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-87652696120292218372021-11-08T12:42:48.757-06:002021-11-08T12:42:48.757-06:00OEE,
"FRestly, when you ... can give a stabl...OEE,<br /><br />"FRestly, when you ... can give a stable coherent definition of that concept, we'll take up the discussion again."<br /><br />Again, READ THE BLOG. It explains exactly what I am describing in detail.<br /><br />"You're chasing will-o-whisps invoking those two concepts as a basis for pricing of your government equity instrument."<br /><br />How is that any different from monetary policy, or the Taylor rule?<br /><br />https://en.wikipedia.org/wiki/Taylor_rule<br /><br />Implicit in the Taylor rule is the logarithm of potential output.<br /><br />Or how about incorporating "expectations" into any economic model? How do you quantitatively measure something as ephemeral as what an individual or group of individuals might expect?<br /><br />"If an entity is a going concern, and not insolvent, then it is irrelevant whether the firm's assets include a forward contract or not provided the terms..."<br /><br />It is very relevant when bankruptcy for profit is taken into consideration. Again see:<br /><br />https://papers.ssrn.com/sol3/papers.cfm?abstract_id=227162<br /><br />A firm with non-transferable assets will have a higher value as a going concern versus it's liquidation value. <br /><br />It is very relevant when the realizable returns on the equity ( discount rate d ) held by a firm exceed it's real (inflation adjusted) cost of capital ( d(t) > k(t) - dP(t)/P(t) ).<br /><br />R.T. = Richard Thaler??FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-69604186064852307432021-11-07T23:39:51.578-06:002021-11-07T23:39:51.578-06:00FRestly, when you determined whatever it is that y...FRestly, when you determined whatever it is that you are to as "government equity" and you can give a stable coherent definition of that concept, we'll take up the discussion again.<br /><br />If the outcome in period t+n of a business decision to invest in a project in period t is known with certainty, then the rate of return is the risk-free rate, r. Since we are talking about a risky forward contract, offered at a discount rate, d > r, certainty as to the outcome in period t+n is not known in period t, and the astute business executive will use his firm's cost of capital, k, as the yardstick with which to judge the attractiveness of the investment opportunity.<br /><br />... "in relationship to the real potential GDP + output gap"? Neither "the real potential GDP", nor the "output gap" are observable quantities. Those are neo-Keynesian theoretic conceptual state variables. They're not measurable. A dynamic system that incorporates those concepts as state variables is a purely abstract construct. It's a bit like invoking the "market portfolio" in a theoretical discourse and then substituting the S&P 500 Index as the "market portfolio" when applying ICAPM or CCAPM to determine the cost of equity or the performance of a portfolio manager's ability to beat the market on a risk-adjusted basis. It sounds sophisticated and it stuns the audience into silent reverie whenever the terms are uttered but it has little practical value or significance outside the academy. You're chasing will-o-whisps invoking those two concepts as a basis for pricing of your "government equity" instrument.<br /><br />If an entity is a going concern, and not insolvent, then it is irrelevant whether the firm's assets include a forward contract or not provided the terms and the counter party are solid and can be expected to achieve a risk-adjusted rate of return in excess of the cost of capital. We might add that the cost of capital in economic terms are k plus the rate of depreciation and depletion, as the case may be, of the asset in question.<br /><br />A firm having an after-tax weighted cost of capital of 5% per annum would likely be a regulated utility in a stable industry sector. <br /><br />rtOld Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-82037215903111677342021-11-06T10:47:32.707-05:002021-11-06T10:47:32.707-05:00OEE,
"This is one reason why I don't agr...OEE,<br /><br />"This is one reason why I don't agree with your conclusion regarding GEqty as a means to increase GDP growth."<br /><br />Just to be clear, I stipulated that GEqty will result in an increase in Real GDP growth ( Y(t) ), not nominal GDP growth ( P(t) * Y(t) ).<br /><br />When a firm purchases GEqty, the rate of return offered by Treasury can be set in excess of the firm's REAL cost of capital ( k(t) - dP(t)/P(t) ) not k(t).<br /><br />For instance (an example) - firm's nominal cost of capital ( k(t) ) is 5%, firm's real (inflation adjusted cost of capital ( k(t) - dP(t)/P(t) ) is 10%. Treasury sell's equity with a discount of 10%. Firm's AFTER TAX real cost of capital is now 0% even accounting for deflation ( dP(t)/P(t) is -5% ).<br /><br />Again, if you read the Blog, I already said that the discount rate should be adjusted in relationship to the real potential GDP + output gap.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-90788313187286714002021-11-06T10:38:16.199-05:002021-11-06T10:38:16.199-05:00OEE,
"Certain intangible assets that are obt...OEE,<br /><br />"Certain intangible assets that are obtained through licensing where the license prohibits assignment or transfer of the assets to a third party can add value to the firm. The only way that I can GEqty adding value to the firm is through a conservative approach in the manner that I have laid out previously, i.e., the discount rate, d, is higher than the cost of capital, k(t)."<br /><br />When a firm enters into a licensing agreement, does it always know up front whether the returns on those non-transferrable licenses are going to be greater than a firm's cost of capital - I would suspect not. When a firm expands it's business, does it always know whether that expansion is going to pay off in terms of higher returns - again I suspect not. - It's called taking risk. <br /><br />"If you the borrower were to buy a 2-year forward contract (GEqty), and it was prohibited under the loan contract, I would issue a notice of technical default to you and I would send in a receiver (big name accounting firm) to audit your firm's books to protect the bank's investment (the loan)."<br /><br />Do the same loan contracts preclude a firm from entering a licensing agreement?<br /><br />"Bottom-line: GEqty() won't save an insolvent firm from receivership and bankruptcy."<br /><br />I never said it would. What I said is that non-transferrable GEqty will make the company more valuable as a going concern versus it's liquidation value for the same reason that non-transferrable licensing agreements make a company more valuable versus it's liquidation value.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-28402158867074898532021-11-05T18:54:39.681-05:002021-11-05T18:54:39.681-05:00"Are there examples of non-transferrable comp..."Are there examples of non-transferrable company assets that cannot be borrowed against, but are treated as a positive entry into the book value of a company? I would think there are, but specific examples elude me."<br /><br />"...a positive entry into the book value of a company" -- I think what you are attempting to ask is whether a non-transferrable asset acquired by a company can lead to an increase in the value of the firm over and above the acquisition cost. The answer is yes, a non-transferrable asset can raise the value of the firm's equity if it yields a return on capital in excess of the cost of capital, k(t). Certain intangible assets that are obtained through licensing where the license prohibits assignment or transfer of the assets to a third party can add value to the firm. The only way that I can GEqty adding value to the firm is through a conservative approach in the manner that I have laid out previously, i.e., the discount rate, d, is higher than the cost of capital, k(t), and the total value of the forward contracts entered into is not larger than the sum of the (conservatively) expected future income tax liability of the firm's "cash cow" business segment(s) at the maturity date(s) of the contracts. Any other approach will result in the rate of return falling short of the cost of capital and therefore will not be accretive to the corporation.Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-9014027696557109432021-11-05T18:41:22.831-05:002021-11-05T18:41:22.831-05:00"How would a prospective lender treat the sec..."How would a prospective lender treat the securities when looking at the viability of a company? Meaning should ownership of the securities be transferrable under the condition of bankruptcy or other transfer of ownership of the company."<br /><br />Banks have various ways of controlling the business lender's investment decisions. Assume that GEqty() is as originally described in these blog pages (not as revised on your blogspot postings). Then, the lender (a commercial bank) may include a prohibition on entering into the forward contract GEqty() if the lender perceived that the borrower might be inclinded to divert funds from operations (which support debt servicing) to financial investments (such as GEqty) that put funds from operations beyond the reach of the bank in the event of an insolvency or imperiled a working capital condition in the loan indenture. If I were the lender, I would definitely include a caveat in the loan contract prohibiting purchase of forward contracts having a term to maturity longer than, say, 1 year. If you the borrower were to buy a 2-year forward contract (GEqty), and it was prohibited under the loan contract, I would issue a notice of technical default to you and I would send in a receiver (big name accounting firm) to audit your firm's books to protect the bank's investment (the loan). Other provisions of the loan indenture would control strategy, debt:equity, coverage ratios, etc.<br /><br />This is one reason why I don't agree with your conclusion regarding GEqty as a means to increase GDP growth.Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-63429895867887845392021-11-05T18:29:03.290-05:002021-11-05T18:29:03.290-05:00FRestly, I will look at the blogspot postings, tim...FRestly, I will look at the blogspot postings, time permitting -- I haven't had the time as yet (lost a computer two days ago and have been scrambling since to retrieve the accounting data for an estate that I administer).<br /><br />Bankruptcy and receivership change the ownership of the bankrupt's assets and leave the liabilities in the insolvent firm (the debtor). A bank that places a firm into receivership appoints a receiver. If the corporate name of the solvent firm was ABC Future Engineering, Inc., the assets will be transferred to a new corporation, say, ABC Future Engineering in Receivership, Inc. The receiver will determine whether GEqty can be transferred into the Receiver's name. The discussion will be held between the US Treasury and the Receiver. If it can't be transferred or assigned then it will probably be left in ABC Future Engineering, Inc. and the non-bank creditors can fight over it (the IRS will likely claim it as the priority creditor).<br /><br />The decision on whether to continue operating the firm in receivership depends on the lenders' appetite for risk and whether the operations are worth more alive than dead. Most receiverships operate on a very limited basis and then only to sell the firm's assets to another firm or an investor in whole or in part. Sixty days is a common time frame for disposing of the assets following appointment of the receiver, although it can take longer in the case of more complicated organizations (international assets, multidivisional domestic operating in more than one state, etc.) GEqty wouldn't make a difference at all to the receiver--if it can't be sold assigned or transferred, he'd dump it and continue working to maximize the realization of the remaining assets for the bank his client.<br /><br />When the receiver has collected the value of the assets for his client, the bank, then ABC Future Engineering, Inc., which by that point has been stripped of all of its marketable assets, is petitioned into bankruptcy through the courts in order to resolve the liabilities.<br /><br />Bottom-line: GEqty() won't save an insolvent firm from receivership and bankruptcy.Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.com