Comments on: US slumps, trade deficit doesn’t shrink … http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/ Wed, 07 Jan 2009 21:22:26 +0000 http://wordpress.org/?v=2.6.1 By: Guest http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96190 Guest Sun, 29 Apr 2007 05:00:18 +0000 http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96190 Further, the instantaneous rate of growth for the first 25 years is 0 and the instantaneous rate at the birth of the twins is infinity. This is a particularly annoying aspect of the time series - head in the oven, feet in the refrigerator ... tortoise and the hare ... etc. etc. (I did smile at your comment by the way). Further, the instantaneous rate of growth for the first 25 years is 0 and the instantaneous rate at the birth of the twins is infinity. This is a particularly annoying aspect of the time series - head in the oven, feet in the refrigerator … tortoise and the hare … etc. etc.

(I did smile at your comment by the way).

]]> By: Guest http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96189 Guest Sun, 29 Apr 2007 04:34:03 +0000 http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96189 Assuming the parents bore the first two children at the very advanced age (back then) of 25, assuming twins for mathematical simplicity, and overlooking necessarily implied downstream incest for moral simplicity, this would start the compound growth rate at 2.81 per cent, far exceeding the assumed 1 per cent rate. Even compound interest, while theoretically translatable to instantaneous rates of compounding, is generally not instantaneously payable. (I'd be interested in a counterexample if you know of one). I'll have to look back at some of the literature on historic dynamics of stock market indices some time. I know that ‘survivorship' of index members plays a big role, but I'm too lazy right this moment to recall exactly how. There is obviously an analogous factor at work in the real world for the population mathematics cited. Assuming the parents bore the first two children at the very advanced age (back then) of 25, assuming twins for mathematical simplicity, and overlooking necessarily implied downstream incest for moral simplicity, this would start the compound growth rate at 2.81 per cent, far exceeding the assumed 1 per cent rate.

Even compound interest, while theoretically translatable to instantaneous rates of compounding, is generally not instantaneously payable. (I’d be interested in a counterexample if you know of one).

I’ll have to look back at some of the literature on historic dynamics of stock market indices some time. I know that ‘survivorship’ of index members plays a big role, but I’m too lazy right this moment to recall exactly how. There is obviously an analogous factor at work in the real world for the population mathematics cited.

]]> By: Macro Man http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96188 Macro Man Sun, 29 Apr 2007 04:13:30 +0000 http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96188 I suppose the obvious question is how that first couple would have grown 1% per annum... I suppose the obvious question is how that first couple would have grown 1% per annum…

]]> By: Guest http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96187 Guest Sun, 29 Apr 2007 03:43:37 +0000 http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96187 MM - Terrific. Thanks. Further to Einstein's observation, here's my all time favorite quote on the effect of compounding on growth - maybe one that even he would have appreciated. It's from Mark Blaug's ‘Economic Theory in Retrospect', edition published 1976: "If Malthus were writing today he would no doubt have cited a recent calculation showing that if the human race had sprung from a couple living in 10,000 B.C. and had grown since then, not at the maximum biological rate but only at a modest 1 per cent per annum, the earth would now be a sphere of flesh several thousand light-years in diameter with a surface advancing into space at a rate many times faster than the rate at which light travels." Now you might call that a crowded trade. MM -

Terrific. Thanks.

Further to Einstein’s observation, here’s my all time favorite quote on the effect of compounding on growth - maybe one that even he would have appreciated. It’s from Mark Blaug’s ‘Economic Theory in Retrospect’, edition published 1976:

“If Malthus were writing today he would no doubt have cited a recent calculation showing that if the human race had sprung from a couple living in 10,000 B.C. and had grown since then, not at the maximum biological rate but only at a modest 1 per cent per annum, the earth would now be a sphere of flesh several thousand light-years in diameter with a surface advancing into space at a rate many times faster than the rate at which light travels.”

Now you might call that a crowded trade.

]]> By: Macro Man http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96186 Macro Man Sun, 29 Apr 2007 03:05:51 +0000 http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96186 Guest, the data exists, but I don't have it at hand. If memory serves, the long term nominal appreciation of the Dow is about 10% per year- of which 3% is inflation, 5% real price appreciation, and 2% dividends. Again, these numbers may be wrong- Ibbotson Associates is the best source of this kind of data, IIRC- but I think they're ballpark. In any event, if we strip out the dividends, w're left with an 8% nominal gain per annum. An investment of $100 in 1896 would therefore be worth $512,904 today (1.08^111.) Adding the dividends back in to give a long term nominal return of 10% leaves us with $3.9 million today (1.1^111). Not for nothing did Albert Einstein call interest compounding the greatest mathematical discovery of all time! Guest, the data exists, but I don’t have it at hand. If memory serves, the long term nominal appreciation of the Dow is about 10% per year- of which 3% is inflation, 5% real price appreciation, and 2% dividends. Again, these numbers may be wrong- Ibbotson Associates is the best source of this kind of data, IIRC- but I think they’re ballpark.

In any event, if we strip out the dividends, w’re left with an 8% nominal gain per annum. An investment of $100 in 1896 would therefore be worth $512,904 today (1.08^111.)

Adding the dividends back in to give a long term nominal return of 10% leaves us with $3.9 million today (1.1^111).

Not for nothing did Albert Einstein call interest compounding the greatest mathematical discovery of all time!

]]> By: Guest http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96185 Guest Sun, 29 Apr 2007 01:41:01 +0000 http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96185 MM - I understand the DJIA was launched in 1896. Any data to allow your dividend reinvestment calculation to be taken back that far, or at least further than 1969? The results must be staggering. MM -

I understand the DJIA was launched in 1896. Any data to allow your dividend reinvestment calculation to be taken back that far, or at least further than 1969? The results must be staggering.

]]> By: Macro Man http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96184 Macro Man Sat, 28 Apr 2007 23:39:59 +0000 http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96184 Indeed, an interesting turn of events. With market complacency at close to all time highs (Dow up 19 out of 21 sessions for the first time since....1929) and May a seasonally horrible month for risky assets, perhaps the Turkish army has put the cat amongst the pigeons. Stranger things have happened, viz. Iceland last year... Indeed, an interesting turn of events. With market complacency at close to all time highs (Dow up 19 out of 21 sessions for the first time since….1929) and May a seasonally horrible month for risky assets, perhaps the Turkish army has put the cat amongst the pigeons. Stranger things have happened, viz. Iceland last year…

]]> By: RebelEconomist http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96183 RebelEconomist Sat, 28 Apr 2007 22:09:09 +0000 http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96183 Macro Man, Sure, the dog ate my homework! You follow Turkey, don't you?.....interesting weekend there. Macro Man,

Sure, the dog ate my homework!

You follow Turkey, don’t you?…..interesting weekend there.

]]> By: Macro Man http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96182 Macro Man Sat, 28 Apr 2007 07:06:18 +0000 http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96182 Well, the wife killed a long write up I did, so I'll summarize the points. Guest at 8:41 has hit the crux of the issue; dividends, compounded over time, greatly magnify the returns on equities. At the end of 1969, the Dow was 800 and gold was $35/oz. $800 would buy either 1 Dow unit, or 22.85 oz of gold. Today, the gold is worth around $15,500 while the Dow with reinvested dividends is worth $45,000, even though the headline Dow is now only worth 19 oz of gold. Moreover, one needs to be careful of cherry-picked starting points, no matter what the argument; even excluding dividends, for example, the Dow has sensationally performed gold since the late 1970's. Well, the wife killed a long write up I did, so I’ll summarize the points. Guest at 8:41 has hit the crux of the issue; dividends, compounded over time, greatly magnify the returns on equities.

At the end of 1969, the Dow was 800 and gold was $35/oz. $800 would buy either 1 Dow unit, or 22.85 oz of gold. Today, the gold is worth around $15,500 while the Dow with reinvested dividends is worth $45,000, even though the headline Dow is now only worth 19 oz of gold.

Moreover, one needs to be careful of cherry-picked starting points, no matter what the argument; even excluding dividends, for example, the Dow has sensationally performed gold since the late 1970’s.

]]> By: Guest http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96181 Guest Sat, 28 Apr 2007 06:41:06 +0000 http://blogs.cfr.org/setser/2007/04/27/us-slumps-trade-deficit-doesn-t-shrink/#comment-96181 The point on the gold and Euro prices of the Dow is obvious. But why cherry pick assets in the exercise? One could capitalize personal consumption expenditures as a liability, using a gold or Euro price, and find that the gold or Euro cost of U.S. living has declined relative to the gold or Euro cost of Euro living - including housing. Cash in your gold and Euro Dow now and live high! The point on the gold and Euro prices of the Dow is obvious. But why cherry pick assets in the exercise? One could capitalize personal consumption expenditures as a liability, using a gold or Euro price, and find that the gold or Euro cost of U.S. living has declined relative to the gold or Euro cost of Euro living - including housing. Cash in your gold and Euro Dow now and live high!

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