Economics Questions

Re: Bonds

rhys — Thu, 27 Sep 2007 01:35:24 GMT

Gunslinger:
That is pretty much where I was going with the original post. Bonds are government paper and have no "subjective" value. However, stocks atleast have subjective assets backing them (if you look at fundamentals, etc.), and are not backed by some fiat promise. With US dollars being weak even against a fiat Euro, I am wondering if it is time to throw the bonds completely out (against the advice of pretty much every mainstream investing company) and just place the gamble on stocks since they atleast have subjective value. I am also thinking that the collapse of the dollar would be a means to coming up with a regional North American currency to combat the Euro, (e.g. introducing the Amero after everyone is robbed blind).

I would tend to disagree. There are many types of bonds, and all bonds have subjective value. US stocks and bonds are dollar denominated, so they rely on the same instrument of valuation. Stocks and commercial bonds may be backed by the subjective assets of a private company, but government bonds are backed by the objective tax and seinorage authority of the government. Where do you think the government will get the money to pay the interest on the bonds? Of course, they will just appropriate it from private concerns through taxation or inflation. That taxation and inflation will eat into those subjective assets held by private concerns. Ultimately, bondholders get paid before stockholders, which is part of the reason why bonds are less risky and return lower rates in general. Government bonds return the lowest rates (though they offer good leverage potential) for two reasons 1. Government bondholders get paid before anyone and 2. Governments are not concerned with profit only revenue. As such, holding government bonds is, in some ways, similar to holding inflation resistant cash. And, I don't think that it is practical to eliminate cash, money market, and commercial/government bonds from a balanced investment portfolio. If you don't think the security of these investments warrants the price, there are several ways to short these instruments, but you cannot mitigate the inadequacies you see by moving %100 to stock holdings.

Re: Bonds

aludanyi — Wed, 26 Sep 2007 20:44:13 GMT

Probably I would do the same; bonds are not an option for me :) Anyway I am almost sure that if the dollar collapse all the other major currencies will also collapse. The world economy is no less dependent on the dollar than the US economy. I don't think the Amero is possible after a collapsing dollar. But I think the financial world will do anything to prevent the collapse of the dollar, if they need they will pedge all the other currencies to the dollar just to maintain some virtually stable monetary system (Breton Woods II) :) .

Of course just my humble opinion.

Re: Bonds

Gunslinger — Wed, 26 Sep 2007 20:28:36 GMT

That is pretty much where I was going with the original post. Bonds are government paper and have no "subjective" value. However, stocks atleast have subjective assets backing them (if you look at fundamentals, etc.), and are not backed by some fiat promise. With US dollars being weak even against a fiat Euro, I am wondering if it is time to throw the bonds completely out (against the advice of pretty much every mainstream investing company) and just place the gamble on stocks since they atleast have subjective value. I am also thinking that the collapse of the dollar would be a means to coming up with a regional North American currency to combat the Euro, (e.g. introducing the Amero after everyone is robbed blind).

Re: Bonds

aludanyi — Wed, 26 Sep 2007 19:32:20 GMT

I would better say it is based upon the marginal theory of value. Anyway we are not living in an unhampered free market unfortunately, we are living in a planned economy where we pay for the goods not with another goods (like gold or silver), but with a worthless paper known as fiat money, and unfortunately a bond is also backed with a fiat money and with a promise of a government who can't hold that promise forever. So what do you think about the intrinsic value of a particular good when we measure it not with another good, but with a worthless paper, also what about the intrinsic value of one worthless paper (bond) measured with another worthless paper (fiat money)? In this case economic calculation is impossible, so it is also impossible to made a non quantitative (as the Austrian school also teach us, that we can't compare values by quantitative approach, but only by order, so we can value X more or less than we value Y, but we can't put a number on this. So what I intended to say at the beginning - and answer your question - is that you can use the PRICE of a given quantity (this is also important because talking about value without quantity is nonsense) of a particular good on the market and compare it with the PRICE of another good on a market (given quantity) and then in line with the marginal theory of value (Austrian school) you can subjectively decide do you prefer to buy one or another. But as I said in a previous post bonds are not goods but only worthless paper without real goods in the vault, you simple can't do this "math" so there is no true answer on the question.

Re: Bonds

jterry — Wed, 26 Sep 2007 19:07:15 GMT

As we all know though, value is not intrinsic in a good. The Austrian School is based upon the subjective theory of value.

Re: Bonds

Gunslinger — Wed, 26 Sep 2007 18:08:10 GMT

Thanks for your responses folks.

Re: Bonds

aludanyi — Wed, 26 Sep 2007 16:51:22 GMT

A good thing to follow in any kind of investment is to try to determine the intrinsic value of the thing you are consider to invest (Benjamin Graham and of course Warren Buffett teach us), and if that value is lover than the current market price, then avoid the investing, if it is higher, then buy. I don't believe it is different with bonds, but it is hard to determine the intrinsic value of the bond, because bonds don’t have any real value it is a peace of a worthless paper and its price is the reflection of the confidence of the market in the liquidity of the issuing government. So, your question is I'm afraid a one without a true answer.

Re: Bonds

rhys — Mon, 24 Sep 2007 03:36:53 GMT

It is very difficult to give recommendations when, to an Austrian Economist, markets are constantly bumped and nudged by States. Ideally, there would be a smooth transition in returns from relatively safe (commodities/cash), to less safe (bonds/bills), to even less safe (shares/ownership), to risky (derivatives/insurance). I order these by their chance of paying off (obviously derivatives can be extremely conservative but the derivatives market is zero sum, so you only win when others lose). In an ideal world there would be a smooth transition in risk return ratio through these instruments. The fact that there is often a "gap" between bonds and shares is due to inflation which artificially holds down interest rates. This allows bond issuers to release bonds at lower yields than if the market were free, and increases speculation in ownership, which artificially drives up the price of stocks. Despite this gap, which leads to relative disinterest in bonds, bonds are an important part of a balanced portfolio because bonds can still increase and decrease in yield as the stock market rises and falls. That is, an increase in the price of a bond can more than make up for the fact that it only pays 5.5%. Lets say you hold a debt obligation that pays 7%, and the fed reduces the rate of government bonds. That means that you might now hold the highest yielding debt obligation, and the price of this obligation will increase compared to the new, lower yielding instruments. This allows bonds to be an effective instrument to diversify a portfolio lowering volatility of an investment portfolio. Many investors ignore volatility, but 100% of $0 is $0. Volatility can destroy years of work when one doesn't have a way to increase credit cheaply and significantly. Small investors must take this into account. Bonds can be a very effective hedge to market swings. You should talk to a professional about income bearing investments and tax mitigating instruments. These are often ignored by small investors, but can be part of an effective capital base from which riskier investments can be attempted without devastating losses to principle from excess volatility.

Bonds

Gunslinger — Thu, 20 Sep 2007 13:53:10 GMT

I know most would probably recommend keeping investments in hard money (e.g. gold, silver, etc.), but for those of us who are gambling with 401Ks and IRAs, should we begin to investigate dumping bonds out of our portfolios? If so, would international stocks be a better place for this money (that is if precious metals funds are not an available option). Thanks for your insight.