Nature of Competition: Machine Power Rental 02

 

There are largely two sources of supplying a kind of machine to the rental market, some of those evacuated at expiry of the rental contract and others newly constructed during the period. Incidentally, “the created” are aggregated into the gross domestic investment (I for investment).

 

Construction of the machine. In practice, the machine is generally lumpy and endures for multiple periods of accounting. As such, the household purchases, or invests in, a machine more for the future than for the present.

             The process of making the investment decision when in finance is called “capital budgeting.” Most probably, the so-called “financial economists” have in mind the firm under strict (corporate) governance. The right interpretation, accordingly: The owning households of the firm collectively make the investment decision and take the subsequent actions; then on, the firm rents the ready-made machine from them.

Their so-called “loanable funds.” As investable funds on the credit side, the firm ideally has the net earnings from operation; and, the firm can practically sell its credit to the bank if needs be. Funds from the second source are called “loanable” in macroeconomics jargon. The rest of us never know where for the funds from the first source to go. One thing we know nevertheless is that retained earnings are entitled to corporate saving.

             Much less, we can never be able to tell the internal funds from the external ones: according to financial economists, funds are fungible beyond ear-marking. Eureka! As Thomas Malthus talked about, all the funds are headed for the sea. Incidentally, as the head of coin (like “S”) sinks under the “saltwater of the school,” the tail (like “I”) is by providence to follow suit. That’s the truth no matter what human opinions may be.

“Time value of money.” If in the normal practice of the rest of us, the nameless, the firm with the “investable funds” in hands has two options on the debit side. That’s of course to the spirit of corporate governance no matter what the letters are.

1)     To go for capital budgeting: This means in-house construction and for self-renting of the machine

2)     Distribution of the funds to shareowners: Dividends or buybacks with retained earnings or out-sourced funds.  

The divide line is supposed to be the “time value of money,” say, 2% PA, of the shareholders in aggregate.

             In other words, the discount rate to be used in calculating the PV (for present value) of future cash flows is the benchmark rate, 2% PA; and that after allowances for inflation and risk (from uncertainties) among other villains. Regarding the second source, an A⁺A⁺A⁺ corporation, such as Intel then or Nvidia now, always can and sometimes do issue CPs@1.5%.PA only to buy shares outstanding in markets back.

             The benchmark rate in “real” as “time value of corporate money” is the real of reals in the whole macroeconomics.

How macroscopically to investment. Exogenous to Cambridge, the commonwealth is built by, of and for the people. That’s the easiest of all. Herein, we for simplicity assume the economy-wide time value of money is 2% PA. In addition, money is always money while funds are everywhere funds except for in the Capitol Hill.

             Now back to economics, the capital budgeting varies the name to the “investment decision.” To invest or not to invest: the divide is fixated at the level line of @ 2% PA. This fact rules out any (downward-sloping) demand curve for funds. Ergo, “their so-called IS curve” in the IS-LM model shall be for the heavens, if anywhere.

             A lining in the cloud: both a line and a curve are invisible in the realty, as opposed to in geometry. 

              Asta mañana!

 

Claire Danes: My So-Called Life