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Author Topic: A capital question
rasmus
malcontent
Babbler # 621

posted 26 March 2002 02:23 AM      Profile for rasmus   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Is poor return on capital in Europe overstated? (scroll down)

quote:
Euro gaps

Europe's poor return on capital relative to the US is an obvious explanation for its net outflow of capital and the weakness of the euro. Yet it is striking that the disparity remains so large despite globalisation. For in theory free capital flows should eliminate variations in return arising from different productivity and the rest.

In the latest edition of European Weekly Analyst Goldman Sachs has a brave stab at unravelling the puzzle. Its economists conclude that much of the transatlantic gap in gross rates of return is down to different depreciation. If capital is depreciated at the same rate in the US and Europe they estimate that the US return in the 1990s was 1 to 2 per cent higher, not nearly twice as high as in the OECD data.

Given that the age and composition of the respective capital stocks are different, this is interesting but hazardous stuff.



GLOBAL INVESTING: The darker side to a more robust Europe

quote:
As the world anxiously looks around for an engine of growth, Europe - accounting for nearly one-fifth of global gross domestic product on a purchasing power parity basis and nearly one-fifth of global imports - looks like a prime candidate to join the US in shouldering the responsibility.

Yet there could be an unpleasant side to a stronger Europe. A more robust continent could shift the bias of global investors away from US securities. Most worrisome, the primacy of Europe would mean more European capital staying at home instead of crossing the Atlantic. This would deny the US - whose current account deficit is nearing 6 per cent of gross domestic product - its principal channel of external funding.

Since the late 1990s, Europe's biggest export to the US has been capital. Between 1997 and 2001, European investors accounted for almost two-thirds of total US portfolio inflows. Much of the surge in European investment in the US coincided with the US technology frenzy and the run-up to European Monetary Union. Prior to EMU, European fund managers were large holders of domestic and other foreign Euroland assets. But, with the advent of EMU, their other eurozone assets effectively became domestic assets. Finding themselves light on foreign assets, fund managers readjusted their portfolios away from Europe and into the US.



From: Fortune favours the bold | Registered: May 2001  |  IP: Logged
DrConway
rabble-rouser
Babbler # 490

posted 26 March 2002 03:43 AM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
I gotta question about that depreciation business. Two, actually.

1. How does the OECD derive depreciation? From tax reporting by firms (which is notoriously subject to accelerated write-off provisions in Canada and the USA) or from the national accounts?

2. Do the national accounts themselves derive depreciation from tax reporting or from other sources?


From: You shall not side with the great against the powerless. | Registered: May 2001  |  IP: Logged
rasmus
malcontent
Babbler # 621

posted 26 March 2002 03:59 AM      Profile for rasmus   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
I think that's a question SSH can answer.
From: Fortune favours the bold | Registered: May 2001  |  IP: Logged
SHH
rabble-rouser
Babbler # 1527

posted 29 March 2002 10:32 PM      Profile for SHH     Send New Private Message      Edit/Delete Post  Reply With Quote 
Here’s an essay that delves more into the meat of the matter. The depreciation number is based on the GAAP used in the country in question. Some countries’ GAAP regs equal the tax regs, but most don’t, and the US most certainly does not with GAAP being much closer to the true economics.

BTW, this anomaly is something that has been progressively evolving since the 50’s in that US GAAP used to dominate over all OECD members’ practices by default. No longer as true. And I don’t know how the EU will deal with this. IAS I guess, for metrics and such.

The explanation, while interesting, strikes me as too simple (this stuff is mind-bogglingly complex) in that it leaves unanswered the question of how the wholly owned subsidiaries and branches of the multinationals are treated; not to mention their Transfer Pricing practices. Who knows, maybe the economists standardized the schedules?

While I doubt US capital provides twice the return, I also doubt only a 1-2% spread. The markets aren’t really as “free” as the theoretical assumption and US companies are undoubtedly, generally more efficient, ROI-wise that is, given their regulatory environment. And shareholders have real say, unlike many structures in Europe.


From: Ex-Silicon Valley to State Saguaro | Registered: Oct 2001  |  IP: Logged
DrConway
rabble-rouser
Babbler # 490

posted 30 March 2002 11:26 AM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
Yeah, but as well, in Europe a good deal more financing comes from commercial banks rather than through the stock markets (which, in any case, seem to be relatively unimportant over there). I would also venture to say that there are less stockholders per capita in Europe than in North America.

In any case, if Europe tends to report depreciation in a different manner that suits domestic interests, on a worldwide scale I imagine that it could contribute to a falsely-attributed worsening of return to capital.


From: You shall not side with the great against the powerless. | Registered: May 2001  |  IP: Logged
SHH
rabble-rouser
Babbler # 1527

posted 30 March 2002 11:43 AM      Profile for SHH     Send New Private Message      Edit/Delete Post  Reply With Quote 
Your point regarding commercial banks is true indeed. I’m not familiar with the EU changes, but in the 80s, when I spent a lot of time in Europe, many countries actually had requirements that allotted Board positions to lenders of a certain degree and contracted Trade Unions. I always found these kinds of cross-purposed or self-conflicted arrangements difficult to navigate without a healthy dose of cynicism. Conflicts of interest, of course, occur in US structures too, but it’s just not so blatant (Aurther Andersen notwithstanding).
From: Ex-Silicon Valley to State Saguaro | Registered: Oct 2001  |  IP: Logged
DrConway
rabble-rouser
Babbler # 490

posted 30 March 2002 11:50 AM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
*cough interlocking board directorships involving pals of the CEO cough*
From: You shall not side with the great against the powerless. | Registered: May 2001  |  IP: Logged
SHH
rabble-rouser
Babbler # 1527

posted 30 March 2002 12:13 PM      Profile for SHH     Send New Private Message      Edit/Delete Post  Reply With Quote 
I know, I know. Also not good. But these guys are insanely competitive which helps keep them smart anyway.
From: Ex-Silicon Valley to State Saguaro | Registered: Oct 2001  |  IP: Logged
hfx_ben
recent-rabble-rouser
Babbler # 603

posted 31 March 2002 07:11 PM      Profile for hfx_ben   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
The notion that being insanely competive results in people being really smart moves me to comment here on how values really are social constructs. Imagine, for a moment, the real damage done by our schools ... kids with mangled confidence, warped self-esteem, trained to conformity and educated hardly at all. The fact that there really are so many good and dedicated people engaged in this project make it devilishly difficult to cut into. And so it is when I turn to finance and industry: how is it that so many of our brightest and most skilled devote their gifts and are well rewarded in the project of gilding the lily? Would the world shudder to a halt if ROI were a few points lower? Must the rate of exploitation and accumulation be optimized to such an extreme? What's the compulsion to hyper-development, really, except the sort of gratuitous manifestation of expertise one encounters with train buffs and Dungeon and Dragon fanatics?

I wonder what would happen if a small percentage of this manic energy were harnessed to the project of human needs. What if a number of those hyper-expanded egos discovered some goal over-arching even the acquisition of wealth?

Odd how those whose actions substantiate the pessimistic judgement that human greed is endless turn out to be those who profit most from the system of values such a view perpetuates ... almost as though there's actually some aspect of human agency operating. What would we do, I wonder, if we dared acknowledge that our situation is much more of our making than the profiteers would like to admit.

From: Edmonton, AB | Registered: May 2001  |  IP: Logged
SHH
rabble-rouser
Babbler # 1527

posted 31 March 2002 08:53 PM      Profile for SHH     Send New Private Message      Edit/Delete Post  Reply With Quote 
Yowza! hfx_ben! A Grand Post if there ever was one! This deserves more attention than I have time for right now. (My wife is hungry and I’m the cook). More later; to be sure.
From: Ex-Silicon Valley to State Saguaro | Registered: Oct 2001  |  IP: Logged
DrConway
rabble-rouser
Babbler # 490

posted 01 April 2002 01:36 AM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
I quite agree. The best and the brightest minds of the last twenty years have not devoted themselves to things that would honestly benefit the human race; instead they have largely been directed at the pursuit of the gossamer returns of the paper economy, by devising ever-more-complex financial instruments.

Read the book The Velocity of Money and marvel at how crackerjacks develop complex derivatives and slobber over a stock-market-prediction scheme.

And then cry because you realize that these people in real life are doing almost the same thing.

Cure for AIDS? Forget it. Cure for cancer? Forget it. Developing an option to purchase a bond based on the weather in Algeria? SURE!

On Monetary Policy (Specific to Canada but can be generalized)
On Full Employment and the Paper Economy


From: You shall not side with the great against the powerless. | Registered: May 2001  |  IP: Logged
SHH
rabble-rouser
Babbler # 1527

posted 06 April 2002 05:32 PM      Profile for SHH     Send New Private Message      Edit/Delete Post  Reply With Quote 

[ April 06, 2002: Message edited by: SHH ]


From: Ex-Silicon Valley to State Saguaro | Registered: Oct 2001  |  IP: Logged
SHH
rabble-rouser
Babbler # 1527

posted 06 April 2002 05:42 PM      Profile for SHH     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
The notion that being insanely competive results in people being really smart moves me to comment here on how values really are social constructs.

I wonder. Is placing “value” on comfort, security, beauty, and family a “construct”? I’d guess not. And if these values are best satisfied in Nature’s game of competition is it not smart to play?

quote:
And so it is when I turn to finance and industry: how is it that so many of our brightest and most skilled devote their gifts and are well rewarded in the project of gilding the lily?

I suggest that the “hard sciences” are more intellectually rigorous than the “humanities” thus limiting supply and that these skills are worth more to those that leverage capital knowledge (i.e., all of us that participate in society). The evil hand of Supply and Demand.

quote:
Would the world shudder to a halt if ROI were a few points lower? Must the rate of exploitation and accumulation be optimized to such an extreme?

No, but the collective wealth would be diminished, don’tcha think? I’d like to have a better understanding of “Exploitation” and “Extreme” before I delve.

quote:
I wonder what would happen if a small percentage of this manic energy were harnessed to the project of human needs. What if a number of those hyper-expanded egos discovered some goal over-arching even the acquisition of wealth?

Well, that’s a lot of Hyper-hyperness itself. Needs? Wants? Who’s to decide? The State? Me? You? Imputing moral character, reading the souls of strangers, is a fickle business. Proceed with Caution.

quote:
Odd how those whose actions substantiate the pessimistic judgement that human greed is endless turn out to be those who profit most from the system of values such a view perpetuates ... almost as though there's actually some aspect of human agency operating.

“Human Agency”? Say what? The same could be said of “Envy” as “Greed”. Both I suspect are in play and equally as unflattering. But Envy is unique in that it provides no pleasure to possessor. Thus Greed, naturally, will prevail. Ugly as it may be; it’s much prettier than Envy.

quote:
What would we do, I wonder, if we dared acknowledge that our situation is much more of our making than the profiteers would like to admit.

I don’t know what this means. Much of the complaint I see from the Left is a gripe against DNA. Men like sports and “competition”. They just do for obvious reasons. They also like naked women, for the same obvious reasons. Young boys will play with trucks before dolls and visa-versa. It’s NOT a construct. If I can work harder and be smarter and get the rewards that come with that for my family, why is it any of anybodies business?

Edited to Add This

[ April 07, 2002: Message edited by: SHH ]

[ April 07, 2002: Message edited by: SHH ]


From: Ex-Silicon Valley to State Saguaro | Registered: Oct 2001  |  IP: Logged

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