Richard Murphy says:
November 27 2024 at 11:49 am
If I have to fund £100 in a year and the interest rate is 0% the cost of paying in a year’s time will be £100 nowIf I have to fund it but the interest rate is 100% then I only need put aside £50 now because I can earn the other required £50 in interest over the next year
So, if the interest rate is higher the amount I need to put aside for a future bill is lower
Does that make sense?
Except it doesn’t make sense from the man who has been squealing that we should never use discounting….
So he assumes he can predict paid interest rates over the next year? Right.
( And no, I do not accept the existence of fixed rate bonds. Everything in life has an element of uncertainty. Maybe you won’t get all or or part of the coupon. Maybe some Labour government will spring a tax on you. If the call for £100 in a year is important you ensure you can meet it. Why the time value of money)
If I have to fund £100 in a year and the interest rate is 0% the cost of paying in a year’s time will be £100
nowand meanwhile I have the use of £100. At maturity I repay £100 so I’m back where I started but I’ve had the use of £100 for a year.If I have to fund it but the interest rate is 100% then I
onlyneed to put aside £50 now because I can earn the other required £50 in interest over the next year and meanwhile I have the use of only £50 because the other £50 went into my sinking fund. At maturity I repay £200 so I’m £100 down and have had the use of £50 for a year.Always assuming that the interest rate on the loan is equal to the interest rate I pay.
Does he not pay tax on interest?
He doesn’t ask *why* the interest rate might change between 0% and 100%. If we assume the real interest rate is roughly fixed at 0%, then the difference is all in the inflation rate: 0% or 100%. In which case his nominal £100 buys twice as much in the first case as it does in the second. Which is why we need to invest twice as much money today . And, sure enough, public sector pensions are index-linked. Only if they weren’t could you inflate away the liability (with the associated higher interest rates) in the way he suggests – and governments have frequently done.
If the interest compounded every millisecond you’d only need $36.79 for your $100 in a year.
(Euler’s number.)
Am I to understand from his ravings that the Professor of Accounting doesn’t understand that you actually have to pay back a loan, and not just the interest on it? (And that therefore whatever you have done with the loan had better have earned it back, plus the interest, plus extra for your costs in managing it, plus profit (or utility), or what was the point of taking it out?)
Or does he regard himself as the Chancellor, forever rolling over borrowing by taking out new loans to pay back maturing ones? It might work for countries but just try doing that yourself to any extent.
@HoblinMango
The government will mess with the indexing to insure that the index rate on those pensions is below the real inflation rate. This is done statutorily here in the US.
You know, with the Spud’s sudden interest (sorry) in calculating PV and FV and applying discount rates – I think he has just discovered what “discounting” means in finance. Like any kid with a new toy, he wants to try it out – using his new toy hammer not only to pound nails, but also to dig ditches, polish the silver, and do the washing-up. Until now, he was using “discounting” in the way of ordinary language – ‘to ignore, or to place a lesser value on.’ Hence, his previous disdain for discounting, which he saw as an argument to ignore his concerns.
Frankly, it’s a little frightening that a (former) member of the ICAEW and Professor of Practice at any academic institution (no matter how poorly regarded) should be this ignorant of the basics in his claimed field, but here we are.
I agree with dcardno
Murphy has form for sudden epiphanies in aspects of finance and economics that are generally accepted by others and which he previously rejected as neo-liberal or far right. However, once he has adopted these hitherto blasphemies, he becomes uber enthusiastic, even to the extent of implying he played a part in discovering or formulating them.
I understand it’s actually illegal to try and patent a perpetual motion machine.
Alas not so for a perpetual moron.
This is of course related to the ‘Accounting Streams’ – the latest wheeze alongside ‘Sustainable Accounting’, ‘The Fair Tax Mark’ land so many others that have withered on the vine .
For dcardno/ BF – I treat his claims to have been an accountant with the same lack of belief I do that Kamala Harris worked in McDonald’s. Unless he can produce payslips then I think he is lying and even if he did he simply lacks even a basic knowledge of accounting fundamentals so if he ever did know three things he has chosen to forget them. He is a fraud – pure and simple.
What, like Louise Haigh but without the flamboyant hair?