From, an Austrian perspective, what are the flaws in using the Time Value of Money?
From what I understand the TVoM implies that there is an objective value. Although, I suppose that the requiered rate of return is where subjectivity is factored in.
Also, how do calculate the future value of gold if N = anything, I = 0, Pmt = 0, PV = 1400?
No, it doesn’t imply an objective value because you have to pick a discount rate. If you’re trying to compare it to something for a NPV analysis or something, generally you’d use a supposed “risk free rate” as the baseline (and of course T-bills are the most common proxy for this)…but of course this is flawed for a few reasons.
The flaws come in the nature of the fiat system we live in…
As for gold, there’s really no way to calculate it’s future value for the same reason there’s no real way to calculate the future value of what you’re pricing it in terms of. I suppose if you wanted to pick an inflation rate and apply that, you could factor that in and use today’s price and compare it to tomorrow’s price in terms of the dollars losing the set percentage of their value…but that’s a pretty simple calculation. Not sure if that’s what you’re looking for.
Yeah, you basically answered my questions.
For calculating the value of gold, I suppose you could use “expected inflation” rate. So, if N = 5, I = 8%, PV = 1400, Pmt = 0, then FV = 2057.06. However, I can see how, if you were to use the change in CPI (1.4%) as your inflation rate, N = 5, Pmt = 0, PV = 1400, then FV = 1500.78.
Hold it right there gents, how wouldn’t there be any need of discounting future cash flows with a constant monetary supply? If I have 500 bucks now, after a year they’ll be worth 500x(1+i), and this is what I should factor as my opportunity cost. Future prices, whether falling or rising, change nothing at all here. So, what’s that all about?
And in general, I have the impression that TVoM is the ABC of business, and no rational decision can be made in business without some understanding of the opportunity cost in time of your funds. If anything, TVoM is the closest mainstream economics comes to Austrian economics, in giving such value to time.
Yeah basically. But I know I don’t have to tell you the realiability of any sort of “expected inflation rate” is about as strong as realiably guessing where a penny will land when you drop it off the Empire State Building. Basically the only “reliable” part about it is the direction.
Not only that, but we also have to to consider the unknowns in the value of gold. The inflation rate would just tell us about the dollar. But obviously gold’s value will change too as the value of the dollar decreases and more people turn to the metal as store of value…or even an actual exchange medium. Who the hell knows, it might even become the world’s reserve “currency” (I highly doubt it…but then again, the U.S. doesn’t completely rule the world, and other powerful countries have their own interests to protect.)
So for discussion’s sake, if you really wanted to, you could just use “expected inflation” which could be an official quoted rate, or whatever more realistic rate you might come up with and then just translate that to a proportional increase in the price of gold, but just recognize that it’s not really a true measure, it’s just something you’re doing for the sake of the discussion. Kind of like “adjusting for inflation.” Of course it’s not really accurate, but you’ve got to do it.
There are far too many factors that are just too unpredictable to get any sort of guesstimate on the future price of something like gold…at least in any meaningful sense. And there’s almost no reason to try to figure one. At this point it’s really impossible to tell just how low the dollar will go. The more I look at the numbers, the less idea I have of what exactly is going to happen. I am optimistic that the American public will gain the political will to put the brakes on the printing press, but at the same time, if they don’t, there’s no telling how bad it’s going to get. America has never been in a situation like this before, but plenty of other countries have…and their curencies don’t exist any more. I just don’t know.
What I do know is the HUI index is up 1200% over the last ten years, and gold itself is up around 500%. The point is it’s almost not that relevant where gold will end up, but just that wherever that is, it will be on the right side of the wave.