Archive for December, 2010

The reasons people trade (Larry Harris)

Friday, December 17th, 2010

Money is something that is fundamentally zero-sum. Its power lies in its ability to facilitate trade, as per the motives stated in Larry Harris’ excellent taxonomy:

  1. Investment — one invests to transport cash today into the future, matching a positive cash flow today with a negative cash flow tomorrow
  2. Borrowing — one borrows to do the opposite of investment, matching a negative cash flow today with a positive cash flow tomorrow
  3. Asset exchange — one exchanges items of lower subjective value for items of higher subjective value
  4. Hedging — one hedges to buy insurance, paying a premium to obtain greater certainty in outcomes
  5. Risk dilution — one transfers idiosyncratic risk / uncertainty to many different participants, allowing diversification to reduce the net impact of uncertainty on human happiness
  6. Gambling — one gambles for entertainment, receiving amusement from the uncertainty of outcomes
  7. Speculation — one speculates to profit from predicting future prices
  8. Dealing — one deals to profit from matching buyers to sellers

Macroeconomic dichotomies

Friday, December 10th, 2010

From Econtalk

Important dichotomies to be precise about:

  • Trade balance: Import vs. Export
    • Having a trade deficit does NOT mean you are incurring debt.
  • Financing: Equity vs. Debt
    • Debt is NOT necessarily tied to consumption or investment, it is tied to leverage. Debt financing brings cash flow obligations capable of triggering defaults. With equity financing, there is no obligation, just an allocation of returns.
  • Production: Consumption vs. Investment
    • This is NOT pegged related to imports or exports, but rather to the decision to benefit now or benefit later. Investment is delayed consumption.