tag:blogger.com,1999:blog-6704573462403312459.post8238768036983605164..comments2024-03-29T02:53:03.321-04:00Comments on Moneyness: It was the best of times, it was the worst of timesJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-6704573462403312459.post-30158095119460997222014-07-09T22:29:11.165-04:002014-07-09T22:29:11.165-04:00Back from holiday.
"Think of historic deprec...Back from holiday.<br /><br />"Think of historic depreciation accounting as a hedge for the required repayment of historic nominal debt incurred. If the machine is financed by debt, then deprecation allows the accumulation of cash equivalent to the required debt principal repayment. That is a return of nominal capital."<br /><br />I suppose we could think about depreciation that way. I believe the standard was of conceptualizing depreciation is as a general "using up" of capital. This using up is independent of the method of financing, whether it be debt, equity, or internally generated cash.<br /><br />"Markets are expected to look through this, including understanding the difference between profits generated from past decisions and expected future profits generated in large part by future decisions."<br /><br />That's pretty much my point. If people are characterized by money illusion, they won't be able to look through the veneer created by historical cost deprecation.<br /> JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-80399022061930341112014-07-04T02:38:16.820-04:002014-07-04T02:38:16.820-04:00Regarding your up front example – in general, I’m ...Regarding your up front example – in general, I’m not sure this is right.<br /><br />Think of historic depreciation accounting as a hedge for the required repayment of historic nominal debt incurred. If the machine is financed by debt, then deprecation allows the accumulation of cash equivalent to the required debt principal repayment. That is a return of nominal capital.<br /><br />Everything else that pertains to this historic transaction is captured in the income statement – including the expense of paying interest on the debt and the required/realized return on equity.<br /><br />Apart from that, any relative increase in the cost of new machinery is covered by the expected economics when that transaction occurs. The new pro formas have to allow for a required return on equity on that basis (and all the rest, including required depreciation). But that doesn’t happen until an actual transaction to buy a new machine.<br /><br />In other words, the historic depreciation is not intended and not required to cover increases in replacement cost.<br /><br />Markets are expected to look through this, including understanding the difference between profits generated from past decisions and expected future profits generated in large part by future decisions.<br /><br />That’s my very quick reaction, just having seen this.<br /><br />I haven’t looked closely at your BEA analysis yet.<br /><br />JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-87880882389625203592014-07-03T12:14:14.233-04:002014-07-03T12:14:14.233-04:00Sorry Tom, I don't know much about modeling.Sorry Tom, I don't know much about modeling. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-50486037240460796542014-07-03T12:12:31.436-04:002014-07-03T12:12:31.436-04:00"Doesn't the lag associated with historic..."Doesn't the lag associated with historical cost accounting, and its potential to trip up Wall Street and economic forecasts, suggest that some other method would be preferable?"<br /><br />LIFO accounting for inventories and market-based accounting of depreciation would probably be good additions to a firm's financial reporting requirements. But they already report so much data these days. <br /><br />"...the real possibility that Wall Street might still be fooled occasionally by something as simple as historical costs seems to lend credibility to the idea that central bank induced "noise" w.r.t. interest rates and relative prices really could distort investment and consumer borrowing decisions."<br /><br />I think its reasonable that people can be fooled for a while. After a period of rising prices investors will start to learn about the discretionary effects of historical cost accounting and start to make the necessary analytical adjustments on their own. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-40927631074230146502014-07-02T22:13:48.284-04:002014-07-02T22:13:48.284-04:00Nice post. Doesn't the lag associated with his...Nice post. Doesn't the lag associated with historical cost accounting, and its potential to trip up Wall Street and economic forecasts, suggest that some other method would be preferable?<br /><br />And while I'm still undecided on Austrian business cycle theory, the real possibility that Wall Street might still be fooled occasionally by something as simple as historical costs seems to lend credibility to the idea that central bank induced "noise" w.r.t. interest rates and relative prices really could distort investment and consumer borrowing decisions. A common critique of ABCT is that it assumes that normally astute entrepreneurs are just dopes when it comes to interpreting interest rate movements and the forecasting the path of future central bank policy. But really, how many investors and business owners could accurately give a description of how monetary policy works today, let alone predict how the central bank will act in the future? John Snoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-7102796990113556312014-07-02T20:15:29.269-04:002014-07-02T20:15:29.269-04:00JP, O/T: quick question: if you had a theoretical ...JP, O/T: quick question: if you had a theoretical model of the price level (P) that worked for different economies, so you could make plots like <a href="http://4.bp.blogspot.com/-LnhMz8TjIjo/U7NFZRdL48I/AAAAAAAAFPM/w8tJKBSOciw/s1600/oh+canada+gdp+and+mb.png" rel="nofollow">this</a> and <a href="http://2.bp.blogspot.com/-Lv9tcB4X70o/U7NHd-R16CI/AAAAAAAAFPY/6eK0ETmI2jE/s1600/japan+price+level+update+6-13-2014.png" rel="nofollow">this</a>, i.e. demonstrating how your model compared with the empirical data, and you wanted to compare with other macro modelers doing the same thing, where would you turn first? Any particular name to look up?Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-34952499998848314642014-07-01T07:01:17.429-04:002014-07-01T07:01:17.429-04:00Noise illusion can happen to the best of us too!Noise illusion can happen to the best of us too!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-61230958278174181372014-06-29T15:24:27.707-04:002014-06-29T15:24:27.707-04:00"Depreciation (or capital consumption allowan..."Depreciation (or capital consumption allowance) is added to get from net domestic product to gross domestic product." http://en.wikipedia.org/wiki/Gross_domestic_productJP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-77901391450143469112014-06-29T13:13:08.248-04:002014-06-29T13:13:08.248-04:00Hi JP!
I have a real trouble to follow your thoug...Hi JP!<br /><br />I have a real trouble to follow your thoughts mostly because GDP (and GDI which is the same) doesn't include depreciation at all, or that is, at least, what Wikipedia says. Consequently the profits included in the GDP are the profits before depreciation expenses are accounted for (the gross profits).<br /><br />If you add (or rather substract) the depreciation costs to the GDP, you get a different measure, called appropriately NET domestic product (NDP), which is not the one in question.<br /><br />So, it should be irrelevant for the GDP (and GDI) calculation, whether you calculate the depreciation at the historical or the mark-to-market basis. And if so, what is your post about?<br /><br />Or did I get it entirely wrong and you are speaking about some other kind of depreciation?Alex Hummelhttp://saldenmechanik.wordpress.com/noreply@blogger.com