Ritchie Elsewhere!

From his Forbes column:

Secondly, and more importantly, the idea of discounting the future is fundamentally subversive.

Net present value is subversive now, is it?

Then:

Wherever there’s been mark-to-market or fair value accounting, executives in the financial world have used this technique to book profit and pay the bonuses made for themselves.

Sorry, NPV, mark to market and fair value accounting are all synonymous are they? Instead of being rather at odds with each other?

For example, your NPV might tell you that your holdings of option ARM mortgages are just fine and dandy. But the market might tell you that they\’re near worthless.

Which is correct in the long term is moot for this point: to claim that both valuation processes are exactly the same thing is absurd.

I have a feeling that what he\’s done is take the theoretical (and obviously true) point that the value of something today is the value of all future returns to it discounted at the appropriate interest rate and assume that prices in markets are exactly this.

Entirely missing out his hero Keynes\’ points about animal spirits.

How did he get a column there?

9 comments on “Ritchie Elsewhere!

  1. “When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”
    “The question is,” said Alice, “whether you can make words mean so many different things.”
    “The question is,” said Humpty Dumpty, “which is to be master — that’s all.”

  2. If he doesn’t like discounting the future, I’ve got a proposition for him. I’ll borrow £100,000 from him now, and pay him back £100,000 in, ooh, about twenty years’ time. Or thirty; it really doesn’t matter all that much.

    Surely he’ll take it, what with not being a dangerously subversive discounter of the future.

  3. Do you think Murphy could, say, derive the valuation of an an annuity or a perpetuity from first principles?

  4. C’mon people. We should welcome Ritchie’s opposition to discounting the future.
    If people didn’t discount the future, undated gilts would be infinitely valuable. So the government could borrow an infinite amount at zero cost. This would allow it to abolish all taxes. I’d have thought you classical liberals would support that.

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