Time Preference: The Future is Today

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I was walking down the street wearing glasses when the prescription ran out. —Steven Wright

Time Preference

People value present goods over future goods. Would you pay 50 cents for a glass of beer today or a year from now?

An increase in time preference implies that a higher ratio of income is devoted to consumption vs. savings and investment for the future. Central banks with their policy of financial repression (Zero Interest Rates Policy or “ZIRP”) want to “correct” underconsumption.  Please take me to meet an “underconsumer.”

While aggressively seeking to increase time preferences with all its negative implications, on the one hand, central banks are trying to give the impression that time preference is lower than it really is by making current levels of consumption seem more sustainable by forcing down interest rates and replacing savings with cheap credit. This artificially extends time horizons and increases confidence. However, a rising time preference is indicative of a weakening economy, not a strong one and one which is more vulnerable than it appears…..

If central banks induce businesses to make incorrect capital investment decisions, the end result will be that production is out of line with consumption preferences. This will distort the ratio of capital and consumer goods. In such circumstances some of the increased capital goods will turn out to be mal-investment. Capital will decrease both in terms of physical wastage and loss of value, and decisions on new investment will be cancelled.  Look at the cyclical iron ore and coal markets today! Note KOL (Coal ETF)

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If you invest in any business that is cyclical then read this:

Selling-Time What is happening today due to central bank distortion of time preferences. Must Read!

The Pure Time-Preference Theory of Interest_2 The following essays parse through the uniquely Austrian insight of the pure time-preference theory of interest, but more importantly go to the core of why modern central bank monetary engineering leaves the economy further from recovery while at the same time providing a Petri-dish for speculation and mal-investment–Douglas French

For those who want to go even further:

 

The Gold Market

The twilight zone in gold (from Monetary-Metals): Spot Gold trades at a premium to distant contracts.  Financial historians will look back in fifty years and ask what were they thinking? We live in the biggest global credit bubble in history.

For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph: The Gold Basis and Cobasis and the Dollar Price

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Along with the rising dollar (green line), we see rising scarcity in gold (i.e. cobasis, the red line or the bid for spot gold is rising relative to the offer for future delivery). One could now earn 0.34% annualized, to sell a bar of gold and buy a June contract. Where else can one get that kind of return on a two-month bill or note? This opportunity should  never exist in the gold market, but it does. The August contract is not backwardated yet, but it’s close.  (Source: www.monetary-metals.com).

A scramble to obtain physical gold is indicative of a rising time preference or time horizons are becoming shorter in the gold market. I want possession of my gold NOW rather than not risk obtaining it in the future. A sign of increasing risk awareness.

We live in interesting times.

 

 

5 responses to “Time Preference: The Future is Today

  1. According to George Reisman:
    Profit Margins = Capitalists’ Time Preference

  2. Yes! Thank you Ruben for mentioning this. Page 55 in Capitalism (google Reisman Capitalism.PDF) or buy the book and read all 1,000 pages. If ONLY someone had smashed me in the face and told me I had to read that book, I could have stayed with my housing/building stock shorts for longer! :). I can’t emphasize enough how important time preference is in investing. Alas, most people will jiggle with their spreadsheets doing a DCF when the deluge hits. The pundits on CNBC will be saying, “Who knew?!”

    In addition to the law of diminishing marginal utility, there is a second major economic principle of valuation that closely bears on the subject of scarcity, namely, that of time preference. Time preference operates to maintain the specific scarcity of savings and capital.

    An individual values goods available to him in the present more highly than goods available to him in the future.

    Like any principle, that of time preference must be understood as applying other things being equal. The prospective marginal utility of a unit of a good in the future can be higher than its marginal utility in the present, if one expects to have fewer units in the future.

    Or you prefer a glass of ice in Las Vegas more in July than today in April because of the heat.

    Ruben, have you read the entire book? I have four chapters to go. But I will need to reread parts of the book. Thanks again for mentioning.

  3. Just mention that I wrote to you about Reisman’s book long ago… but I haven’t read the whole book yet. I read only the part where Reisman deals with profit margins.

    http://csinvesting.org/2014/01/14/understand-why-profit-margins-will-collapse/

    Stan Druckenmiller recently talked about the same when he said that US corporations have borrowed $3.5B since 2008 (today, total corporate debt is $7B from $3.5B in 2008). Those proceeds went primarily to buybacks and dividends… no capex (minute 14:35).

    http://www.bloomberg.com/news/videos/2015-04-15/stan-druckenmiller-zero-interest-rates-unnecessary-now

    Regards from Spain

    • How are you finding Reisman’s book. It takes diligence but well-rewarded effort I think.

      Right now, I am busy trying to find someone to pay to explain this conundrum:

      If central planning has failed in efficiently developing and growing an economy–North Korea, Eastern Europe, Venezuela, Cuba, etc., etc.
      THEN why have centrally planned interest rates and money? Offering $1 million in gold bars.

  4. It’s not an easy one, especially when – as in my case – English is not your mother tongue.

    As for your question, maybe central planning has failed in efficiently developing and growing an economy but not in procuring privileges for a few.

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