Procrustean Art of Backtracking: “Downward-Sloping Investment”

 

We often refer to 5W 1H. With us (Who) and the community (Where) given, we usually ask the Why question first, followed by What, When and How.  

Question 1. Why do we make investment? Is that for the future return or in avoidance of “the opportunity cost” now? Anyone in the right mind would choose the former. More specifically, investment is for the return per dollar (1) per period (1), or the rate of return in percentage per annum. The percentage is nothing other than certain numeric per 100, where the unity (1) is indexed to 100. “The rate of return” in Finance is somehow called “the interest rate” (i for nominal, r for real) in Economics. 

Question 2. What do we invest in? The most probable answer would be: the best-expected return after deduction of all transaction costs (including risk premiums of various types).

Question 3. What is the most urgent thing you would like as alternative to your investment decision? How often, if ever, would it be “the interest rate” on your deposits, or “supply of funds” if you will?

Question 4. Which is the bigger, the aggregate investment in the personal capacity or another through the firms you partially own? (Note: Firms are the “Aggregate Supplier” of Y= C+ 1.)

Question 5. How would you compare the aggregate investments in existing assets, physical, durable and financial combined, to the gross domestic investment (I= Y– S)? 

Question 6. Money being beyond tagging or earmarking, what would be the largest source of money for your investments, those for portfolio management included?

①   Revenues from selling existing assets of physical, durable and financial

②   Disposable income per annum

③   Unearned private incomes

④   The fiscal helicopter drop

⑤   “Borrowing” other people’s savings at the bank

 

Without further due, as regards the gross domestic investment (I for investment in macroeconomics), one of the four legs of IS-LM model, we quote the following from Chapter 3 of N. Gregory Mankiw, Macroeconomics:

Investment depends on the real interest rate because the interest rate is the cost of borrowing. The investment function slopes downward: when the interest rises, fewer investment projects are profitable.  

Very convenient except for being circulatory! Prof. Mankiw relies on the interest rate for the sake of defining the market for “loanable funds” for purpose of determining the interest rate. Alas, the investment schedule must first be defined so as for the interest rate to be determined!

             Which comes first the feet or the bed, after all?

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