On Thu, 26 Mar 2009 09:20:18 -0700, David Epstein wrote: >On Thu, 26 Mar 2009, Mike Palij went: >>Doesn't that depend on how one defines "anyone's contribution to >>anything"? If one can come up with sophisticated mathematical tools >>that allows one to come up with financial derivatives or instruments >>that can earn billions of dollars, what should that person's >>financial compensation be? (For derivatives see: >> http://en.wikipedia.org/wiki/Financial_derivatives ) > >OK; it says: "Derivatives massively leverage the debt in an economy, >making it ever more difficult for the underlying real economy to >service its debt obligations and curtailing real economic >activity...."
I find the concept of "leverage" both fascinating and incomprehensible. I don't understand how if one has $1 one can "leverage" it to some multiple like $5, $10, $50 or $100. It seems like a magical process though I'm sure that someone can either explain it in words or through some math. My understanding is that as long as the processes involved in "leveraging" continued to produce profits, one could endlessly "leverage" the capital one had (i.e., that dollar bill). It was the default of some component (e.g., subprime mortgages) which triggered the payment of insurance (the credit default swaps) but because there wasn't capital to cover the insurance payment (how did that happen?), everything collapsed. I understand the concept of "overleveraging" for stock price where one can examine a price/earnings (PE) ratio. The price refers to the price of a stock relative to the company's earnings per stock. Value investors typically look for a stock with PEs of between 10-20 but in recent years it has not been unusual to seen stocks with PEs of 30-40 (I believe Apple and Google are examples of stocks that had ridiculuously high PEs). However, PEs have largely lost their meaning today (either in their "trailing" form where earnings are from the past 12 months or their future earnings for the next 12 months; all earnings figures are abnormal and future earning are purely speculative since we don't know how the recession will play out). >So I would pay that person his or her weight in festively colored >Monopoly money. Well, given the concept of leveraging and other financial gimmicks (not to mention outright fraud like Ponzi schemes), U.S. currency was and is in danger of becoming little more than Monopoly money. Perhaps Zimbabwe portends our future: http://www.money.co.uk/article/1002494-50-billion-dollar-note-introduced-in-zimbabwe.htm Quoting: |According to today's estimates the $50billion note will trade at |$1.25 US dollars on the black market and have enough purchase |power to buy just two loaves of bread or three newspapers. Hmmm, two loaves of bread or three newspapers? Remember: invest in gold coins in order to bribe the guards at the border. -Mike Palij New York University [email protected] --- To make changes to your subscription contact: Bill Southerly ([email protected])
