Zero/Negative Interest Rates => Enemy of the Industrious

Applying the work of John F. Nash, Jr. in his “Equilibrium Points in n-Person Games”; the market, by accepting zero or negative interest rates is NOT finding the equilibrium point for capital formation. The equilibrium point is found through starting in inflation adjusted terms. Then, the equivalent number of nominal units is calculated to derive pays and collects. Only then do the sums correctly reflect the real outcome of the transaction in the desired stable and known inflation adjusted amount.

Prudent risk management methods, diversification of risk and considered acceptance or avoidance of risk strategies require a clear definition of the alternatives available. Pure strategy (defined as the matching the known, inflation adjusted payment to the expected inflation adjusted income for any activity) must be the starting point of defining the current available market/economic choices. Only within the framework of adjusting the pays and collects to reflect the effects of actual inflation can a given economic wager be reasonably considered as acceptable.

Let’s define a means of a stakeholder risk acceptance game in which each stakeholder has a finite set of capital formation goals within a definitive set of conventional/market acceptable set of structures for pays and collects. The definitive strategies correspond to the then market acceptable strategies considered in respect of business risk, but do not consider the effect of inflation.

In the construct of our game we start the composition of a portfolio in a mutually defined constant purchasing power. The pays and collects will be stated in a marketable currency of agreed choice with the stakeholders focused on the common ground of lower financing risks and costs. The constant purchasing power structure will not punish the borrower nor the lender/investor. The inefficiency and risk of guesses and assumptions about inflation will addressed. Acceptable strategies consistent with the overall goals of both sides of the transaction will be more precisely defined. Portfolios can be created that have a materially higher probability of success in respect of risk being managed and real purchasing power being enjoyed.

Via the integration of a method under which real returns are assured along with the timing of payments being more closely aligned with project and investment cycles, associated benefits to the free cash flows, incomes statements, balance sheets and the delivery of free alpha to the stakeholders is discovered.

In application: Stakeholder 1, a borrower in the first alternative, by not addressing the effect of inflation on project lifecycles chooses to accept the then current structure. The borrower accepts inflation assumptions and current payment schedules deemed necessary by the lender/investor to insure against the risk of projected inflation. By doing so the borrower gambles with its viability. This stakeholder is increasing the variability and volatility of potential outcomes thru acceptance of current thinking.

Stakeholder 2, a lender/investor, by choosing to accept the erosion of assets in a zero/negative nominal interest rate environment, adds additional risk to their ability to maintain a standard of living, attain actuarial calculations, endowment commitments, et al.

1) Sovereigns, political sub-divisions, corporations and individuals are currently accepting the gamble they can “beat” the market and are willing to follow a trend in contrast to the management of their known and potential risks. Unequal beneficial outcomes for all stakeholders is a result.

2) Random outcomes are increased exponentially leading to a) weakened bargaining positions and b) the existence of non-cooperative versus cooperative negotiations.

There must be a more prudent, efficient and economical method that addresses both project/investment lifecycles and the risk of erosion of the purchasing power of the repaid sums.

My thanks to Glenn and an untold number who have been and are an encouragement. BG

Applying the work of John F. Nash, Jr. in his “Equilibrium Points in n-Person Games”; the market, by accepting zero or negative interest rates is NOT finding the equilibrium point for capital formation. The equilibrium point is found through starting in inflation adjusted terms. Then, the equivalent number of nominal units is calculated to derive pays and collects. Only then do the sums correctly reflect the real outcome of the transaction in the desired stable and known inflation adjusted amount.

Prudent risk management methods, diversification of risk and considered acceptance or avoidance of risk strategies require a clear definition of the alternatives available. Pure strategy (defined as the matching the known, inflation adjusted payment to the expected inflation adjusted income for any activity) must be the starting point of defining the current available market/economic choices. Only within the framework of adjusting the pays and collects to reflect the effects of actual inflation can a given economic wager be reasonably considered as acceptable.

Let’s define a means of a stakeholder risk acceptance game in which each stakeholder has a finite set of capital formation goals within a definitive set of conventional/market acceptable set of structures for pays and collects. The definitive strategies correspond to the then market acceptable strategies considered in respect of business risk, but do not consider the effect of inflation.

In the construct of our game we start the composition of a portfolio in a mutually defined constant purchasing power. The pays and collects will be stated in a marketable currency of agreed choice with the stakeholders focused on the common ground of lower financing risks and costs. The constant purchasing power structure will not punish the borrower nor the lender/investor. The inefficiency and risk of guesses and assumptions about inflation will addressed. Acceptable strategies consistent with the overall goals of both sides of the transaction will be more precisely defined. Portfolios can be created that have a materially higher probability of success in respect of risk being managed and real purchasing power being enjoyed.

Via the integration of a method under which real returns are assured along with the timing of payments being more closely aligned with project and investment cycles, associated benefits to the free cash flows, incomes statements, balance sheets and the delivery of free alpha to the stakeholders is discovered.

In application: Stakeholder 1, a borrower in the first alternative, by not addressing the effect of inflation on project lifecycles chooses to accept the then current structure. The borrower accepts inflation assumptions and current payment schedules deemed necessary by the lender/investor to insure against the risk of projected inflation. By doing so the borrower gambles with its viability. This stakeholder is increasing the variability and volatility of potential outcomes thru acceptance of current thinking.

Stakeholder 2, a lender/investor, by choosing to accept the erosion of assets in a zero/negative nominal interest rate environment, adds additional risk to their ability to maintain a standard of living, attain actuarial calculations, endowment commitments, et al.

1) Sovereigns, political sub-divisions, corporations and individuals are currently accepting the gamble they can “beat” the market and are willing to follow a trend in contrast to the management of their known and potential risks. Unequal beneficial outcomes for all stakeholders is a result.

2) Random outcomes are increased exponentially leading to a) weakened bargaining positions and b) the existence of non-cooperative versus cooperative negotiations.

There must be a more prudent, efficient and economical method that addresses both project/investment lifecycles and the risk of erosion of the purchasing power of the repaid sums.

My thanks to Glenn and an untold number who have been and are an encouragement. BG