Thursday, December 29, 2016


Time is of the essence when it comes to deciding the actual agio of a good. The agio, mark up, rate of return or interest rate are all decided by the difference between the buying and selling prices of goods.

In order to understand how an agio is formed, one must first grasp the concept of time. Everything exists within time. Time is scarce and man must economize his time accordingly. Man subjectively values the time in which his actions are rendered, or in which he will exist.

Moreover, man always values money now more than he values money in the future. Rothbard would point out that one tends to discount future goods at a higher rate than present goods. The inverse can be stated as one garners a higher premium for present goods as compared to future goods.

Everything is dependent upon time, and points in time are indeed subjective. Present time is manifested in one's action, when they make their choice on their value scale. The Future exists at any later point in time, it is the action not undertaken.

Thus, as mentioned in my previous blog post about the rate of interest manifesting itself in an individual's choices by using their income, one can also see this confection in the structure of production.

Let us recapitulate, present goods are tantamount to those entities being consumed, in example, the monetary unit of exchange. One sells money, and buys a television.

Future goods are tantamount to those entities being bought or wielded, wherefore, savings (consumption withheld) will be money used in the future. It is hoarded.

Transferring this basic Austrian theory to the structure of production, a Capitalist will advance factors to the various stages of the production process. The Capitalist will use savings, selling money to purchase future goods. These future goods are capital goods.

The Capitalist will hold these goods for a period of time, mixing them with land and labor until a final consumer's good is produced in the future. This consumer's good is then sold at a mark up or rate of return.

Recollecting the common theme of subjective value, we find that for one actor a consumer's good is a present good and for another actor, a capital good is a future good.

Accordingly, savings is also a subjective construct. Holding money in one's pockets is outside of the savings-investment process, whereas money held in demand deposits is still considered savings. Here we arrive at a new discussion of assets withheld earning an agio, and those which are consumed. I believe I have just gone full circle.

Thursday, December 22, 2016

More on the Rate of Interest

Retroactively viewing my description of the rate of interest which derives from individual time preferences, we came across a point where I described the rate of return differently there than the way I described the rate of return with other prices.

Let us harken that moment. On the market, the difference between buying and selling prices equals the rate of return. This is tantamount to the price of Treasury Notes and Bonds in comparison to the yield rendered.

The 10-year Treasury Note sells at a price of $900 with a yield of 4% in present value terms. Par Value of the bond is $1000, hence when the debt instrument matures it will pay out par value. The coupon is 2%, this is the percent mark up at issue.

Each debt instrument has different contractual terms and different moments in time of paying out cash flows. The cash flows will be paid out over the duration of the contract. Those holding instruments look to make money on the spread.

Hence, the spread would be between the face value of the Note and the coupon. If one is holding the Note, the spread they seize would be between the price they bought the Note at, and the price they sell the note at plus the dollar quantity of cash flows they received for the period of time that they held the Note. The yield is a present value abstract contrivance.

Both Notes and Bonds can either be sold at a discount or a premium depending on which mathematical formula is used to calculate the present value of the debt instrument. If this abstract average, the yield, is above the coupon rate (rate of return) the debt instrument will be sold at lower prices. If this abstract average, the yield, is below the coupon rate (rate of return) the debt instrument will be sold at higher prices.

This brings me back to explaining the difference between the Pure Time Preference Theory of Interest and the Natural Rate of Interest. In my last post I described how within a total income of 10, consuming 1 would leave 9 of savings.

Thus, this ratio would be stated as 1/10 where there is a rate of return of 10%. This is tantamount to the pricing of short-term debt instruments. Treasury Bills are sold at a discount for example, where Par Value would be stated as an increment, 100. In consequence, a stated market value of 98, would mean that the yield is 2 or 2%.

All short-term debt instruments, typically less than one year, are sold at a discount. Due to the contract maturing much quicker than Notes and Bonds, this will always be the case. The latter two, longer-term debt instruments, will tend to fluctuate in price, above or below Par, as mentioned above.

In essence, the micro or individual preference of time derived from subjective value scales can theoretically be summed up as previously mentioned. Human actors endue their investment-consumption ratios where the rate of return is subjectively the consumption portion, leaving the consumption withheld as savings.

This is commensurate to the aforementioned example of Treasury Bills, the market price reflecting a reduced price (discount) of Par. Not only is there profit in accordance with a measured price, but there is also mental profit.

The Natural Rate of Interest on the other hand reflects the price spreads of the various factors of the production process. In general, it is the spread between the buying and selling prices of capital goods within the structure of production. Let us not forget, it is theoretical.

Most importantly, the Natural Rate of Interest can basically be described as the average of all price spreads within the the free market. Factors are made up of savings. Therefore, when observing the stock market, the spreads seized in the speculative process, are also price spreads that contribute to the Natural Rate of Interest.

At any one time, the Natural Rate can be conceptualized within various markets, or more broadly in a city or country's economy as a whole. It pervades all markets.

In a truly free market, without the intervention of government, spreads open and close as the speculative process is undertaken, as well as when the nascence of entrepreneurial creations are introduced in the market.

Monday, December 19, 2016

Save Yourself from College Debt

I hardly delve into describing strategies where one can earn a positive rate of return over time. Today I shall elaborate a bit on one that may be helpful to those who believe going to the university is an investment.

Firstly, I will describe the basics of savings. The most rudimentary mechanism is keeping one's money in a savings account which is cash within a demand deposit. At this point in time one can only earn is very small rate of return. It is one offered by a banking institution.

The rate of return offered through a banking institution tends to move in tandem with the fluctuation in yields which is affected by the monopolized benchmark. Of course private contracts can be influenced by any point of reference, whether it be a rate of interest on the free market, or a simple mark up that is decided bilaterally.

Higher rates of return can be effectuated through riskier savings vehicles. Some are packaged, and some stand alone. Some are debt instruments, and some are more liquid, such as equities. Debt instruments are less liquid and less risky. Equities are more liquid and more risky.

There are also other types of contractual bets that attempt to predict the future value of some other underlying instrument. These are called derivatives. They are called hedges or insurance. It is a bet in the fluctuation of the value of the reference instrument. One wins, the other loses. Blackjack.

Insurance is of the most safe savings mechanisms one can find. It is a pooling of liquidity, with the promise to return the same amount paid in, plus a percentage more at a certain point in the future. This would be called the settlement period.

Americans today have taken for granted these basic savings vehicles due to the heavy reliance placed upon entitlements. All entitlements are government programs which are funded by government debt. Government has also exacerbated the welfare consumption of Americans by creating moral hazards. Their monopoly of banking insurance has proliferated speculative bubbles.

Here is one simple way a college student looking to make themselves debt free can do so without looking to the pampering of government when they graduate. This pampering burdens all other Americans in the form of inflation. And unfortunately, the majority of college grads are not necessarily a boon to the economy. Their debt renders them a net burden while in college. America is overleveraged.

A Universal Life Policy with flexible premiums is the best way to accumulate a pool of capital to use in the future, as the asset will cancel out the obligation after college, or at least decrease it's size. With Option A, that is, the option that allows for greater cash value to be accumulated until the age of 100, would be the best choice. The insurance portion levels off at a certain age.

By depositing much more than the minimum every month, one could generate enough cash value so that by at least age 40 or so one could take out a policy loan or surrender the policy and take the cash value, using that to pay off their school loan obligation.

Indeed the surrender would discount the final value, but at least it would help to decrease the student loan obligation. With the Policy Loan, you simply keep paying the premium until death which would also include a smaller mark up, keeping in mind the accumulated interest needs to be paid off for the Policy Loan throughout the remainder of the contract.

The greatest benediction is that the Policy Loan need not be paid back. It will simply be deducted from the death benefit at settlement. This will simply leave for a smaller estate.

Best bet, stop going to college altogether.

Thursday, December 15, 2016

Where is the Inflation Found?

Although much of the data fed through various channels where mathematicians are encountered alchemizing integers can be deceiving, we do sometimes find inklings or traces of correlative relevance towards Austrian Economics.

Austrians understand that data only serves to reify, nothing more. Thus nobody should take a model as an absolute or even as a prescient measurement of truth.

In this case I will attempt to use some of the legerdemain of the statisticians that work for the monopoly of data collection, the US Federal Government.

Here in this chart we see the PPI (Producer Price Index) compared against the CPI (Consumer Price Index).

Many times the actual year over year percentage change can be clandestine depending on the basket or averages one uses.

The basic chart I have chosen is nice because it does somewhat give light to the bidding up of higher order goods during the point in time of the next bubble. That being, as we all know, first TARP and later it's three follow up palliatives, QE1, 2 & 3 with Operation Twist in between.

Retrogressively summarizing, as the new money enters the market the higher order stages grow longer, while the consumption base grows narrower. As the theory goes, this should occur based upon genuine savings.

With a suppression of the benchmark as well as Federal Reserve Bank intervention, more money effuses into the market. This expansion of credit is simultaneous. This is due to the monopolized benchmark that the Fed has wielded through government dictum.

Overall, it is quite evident that although companies expand together when rates are suppressed, companies still invest in long term projects that result in the business cycle tending to commence at the higher ordered goods stage. This would be the abstract average concocted by using commodities prices found in the PPI.

Finally, since inflation exists at all times illusively, we must understand that the business cycle occurs within every market and within every business throughout the market process.