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The current and long-running debt and capital gains driven financial asset market has made everyone insane. If valuations were based on tangible cash flows (di

The current and long-running debt and capital gains driven financial asset market has made everyone insane. If valuations were based on tangible cash flows (dividends paid out of profits) then the question of how much stocks are worth becomes far less insanely self-referential. Real markets work on markup-based pricing and cash flow from profits. See Steve Keen's work[1]. In a world where the banking system can introduce nearly infinite leverage into any financial transaction (see student loans) what's the price of anything? [1] - http://www.amazon.com/Debunking-Economics-Revised-Expanded-Dethroned/dp/1848139926 http://www.amazon.com/Debunking-Economics-Revised-Expanded-D...

grandalf 12y ago
That is true, but I think the counter-argument is that the Fed does much of what it does to create price stability, not price accuracy. Prices should be generally stable in the face of everything but supply and demand shifts brought upon by technological change and competition. If the price of a car rose/fell 20% "accurately" (per your comment) every few years people would have to hedge against the risks that those price fluctuations would cause. Our system reduces the need to worry about such risks b/c they are viewed as unnecessary noise. In other words, when prices are generally stable we can plan for the future rather than hedging against the impact of random (though market-based) price volatility.
JimboOmega 12y ago
I agree with your complaint, generally. One thing I often wonder about is the value of Facebook stock. It has effectively no voting rights (Because of Zuckerberg's control), and I can't imagine Facebook issuing a dividend... so what rights does it really have? How do you value something like that?
- carsongross 12y ago
  Exactly. It's the modern world's equivalent of debating the number of angels capable of dancing on a pinhead. You have these chumps talking about future cash flows and dividend yield equivalents, all the while the board and executives march off with the actual cash. The right thing is to eliminate the tax bias towards capital gains and make dividends tax-deductible for corporations, so they have incentive to pay profits out to, you know, the owners. Basically make them act like big LLCs, which is the fair thing: why should Grandma Jones pay the same corporate rate as Mitt Romney on her investments in Coca Cola before she sees a dime? At some point it'll reverse, but it's been a good forty years, so... who knows?
- meric 12y ago
  In the future when Zuckerberg is finally willing to pay a dividend or he is replaced by a board willing to pay a dividend when he retires. It's hard to value that's why the value of Facebook stock is so volatile.
vasilipupkin 12y ago
valuations are based not just on current cashflows, but future expected cashflows. That's why leverage is so crucial - it allows us to borrow against future cashflows so as to finance projects today. One way to think about, on this forum, we can agree that at some point in the future, we will have self driving cars, automated medicine, low cost energy etc. So, what we can do is borrow against that future to build stuff today
- carsongross 12y ago
  Yes, I understand productive debt and I have no beef with it (so long as no one is coerced into bailing out bad loans, which, of course, is constantly happening in the name of "systemic stability.") If you think this has anything to do with the huge debt overhang in western societies... Well, I have an efficient market to sell you. Read Keen. He explains it very well.

grandalf 12y ago

That is true, but I think the counter-argument is that the Fed does much of what it does to create price stability, not price accuracy. Prices should be generally stable in the face of everything but supply and demand shifts brought upon by technological change and competition. If the price of a car rose/fell 20% "accurately" (per your comment) every few years people would have to hedge against the risks that those price fluctuations would cause. Our system reduces the need to worry about such risks b/c they are viewed as unnecessary noise. In other words, when prices are generally stable we can plan for the future rather than hedging against the impact of random (though market-based) price volatility.

JimboOmega 12y ago

I agree with your complaint, generally. One thing I often wonder about is the value of Facebook stock. It has effectively no voting rights (Because of Zuckerberg's control), and I can't imagine Facebook issuing a dividend... so what rights does it really have? How do you value something like that?

carsongross 12y ago
Exactly. It's the modern world's equivalent of debating the number of angels capable of dancing on a pinhead. You have these chumps talking about future cash flows and dividend yield equivalents, all the while the board and executives march off with the actual cash. The right thing is to eliminate the tax bias towards capital gains and make dividends tax-deductible for corporations, so they have incentive to pay profits out to, you know, the owners. Basically make them act like big LLCs, which is the fair thing: why should Grandma Jones pay the same corporate rate as Mitt Romney on her investments in Coca Cola before she sees a dime? At some point it'll reverse, but it's been a good forty years, so... who knows?
meric 12y ago
In the future when Zuckerberg is finally willing to pay a dividend or he is replaced by a board willing to pay a dividend when he retires. It's hard to value that's why the value of Facebook stock is so volatile.

vasilipupkin 12y ago

valuations are based not just on current cashflows, but future expected cashflows. That's why leverage is so crucial - it allows us to borrow against future cashflows so as to finance projects today. One way to think about, on this forum, we can agree that at some point in the future, we will have self driving cars, automated medicine, low cost energy etc. So, what we can do is borrow against that future to build stuff today

carsongross 12y ago
Yes, I understand productive debt and I have no beef with it (so long as no one is coerced into bailing out bad loans, which, of course, is constantly happening in the name of "systemic stability.") If you think this has anything to do with the huge debt overhang in western societies... Well, I have an efficient market to sell you. Read Keen. He explains it very well.