It depends. If you are referring to the financial structure of the firm. Assume one firm is financed solely with equity and the other with debt. Otherwise, both firms are identical. The market value of both firms is the same. The firms values include claims by both creditors and shareholders, and is not to be confused with the value of the firm. If we accept that an asset is the PV of expected earnings, capital structure is, per, M-M, immaterial. The example I used when I taught at Loyola of Chicago, A house trades for $1,000,000. It was 100% financed by debt. An identical dwelling also traded for $1,000,000, financed completely by equity. As for the home financed totally by debt, I suspect Merton would advise the lender to lend at a rate that compensates him for the risk of default.
Funny how things like abstract economic/financial theory keeps getting whacked by common-sense that every teenager used to know. A man pays his debts. If a person doesn't pay their debts, then they aren't a man - they are a leech. Substitute 'country' for 'man' and it still makes sense. Too bad not very many teenagers (or adults for that matter) seem to think their debts are someone else's problem
It can and should be paid down to the value of the assets it was used to finance -- a lost less than the total.
What cannot be recovered, however, is the transfer of resurces from investmet to consumption that the rest of it represents, the loss of income from the return on those never-made investments.
I have always been a fan of Alexander Hamilton. One of my favorite historical counter-factuals is what if Hamilton had killed Burr? Someone at Hoover needs to ask Lord Roberts and Stephen Kotkin their thoughts on the topic.
“If all the public creditors receive their dues from one source, distributed with an equal hand, their interest will be the same. And having the same interests, they will unite in the support of the fiscal arrangements of the government.” A safe asset like treasuries is a reserve for highly uncertain times. Even in times of high volatility, treasuries are traded in deep financial markets. Foreigners, in particular, are willing to hold treasuries as safe haven instruments. As a result, the government pays low interest rates on her borrowing. The benefit accruing is reflected in real interest rates on treasuries remaining below the global economy’s growth rate. To wit, r<g. The appreciation of treasuries in flights to safety benefit bond holders.
“Europe wishes to issue eurobonds without eurotaxes. They should read Hamilton.”.
member states are obligated under EU law to contribute according to their GNI to the European Commission. These contributions are legally binding and used to pay off NGEU loans.
Perfect timing as usual, John. I read The House of Rothschild just before I came out to see you and the rest of The Goodfellows live, and as soon as I finish “Secrets of the Temple”, I’m diving headfirst into “The Hamilton Scheme” to see what all the hu-bub is about….
When did the Federal government begin deficit spending as a standard practice? Is there not a point when borrowing money will collapse a nation? Just asking!
As I was reading this, I was thinking about M+M theory....What would Merton Miller say about debt?
It depends. If you are referring to the financial structure of the firm. Assume one firm is financed solely with equity and the other with debt. Otherwise, both firms are identical. The market value of both firms is the same. The firms values include claims by both creditors and shareholders, and is not to be confused with the value of the firm. If we accept that an asset is the PV of expected earnings, capital structure is, per, M-M, immaterial. The example I used when I taught at Loyola of Chicago, A house trades for $1,000,000. It was 100% financed by debt. An identical dwelling also traded for $1,000,000, financed completely by equity. As for the home financed totally by debt, I suspect Merton would advise the lender to lend at a rate that compensates him for the risk of default.
Funny how things like abstract economic/financial theory keeps getting whacked by common-sense that every teenager used to know. A man pays his debts. If a person doesn't pay their debts, then they aren't a man - they are a leech. Substitute 'country' for 'man' and it still makes sense. Too bad not very many teenagers (or adults for that matter) seem to think their debts are someone else's problem
It can and should be paid down to the value of the assets it was used to finance -- a lost less than the total.
What cannot be recovered, however, is the transfer of resurces from investmet to consumption that the rest of it represents, the loss of income from the return on those never-made investments.
I have always been a fan of Alexander Hamilton. One of my favorite historical counter-factuals is what if Hamilton had killed Burr? Someone at Hoover needs to ask Lord Roberts and Stephen Kotkin their thoughts on the topic.
“If all the public creditors receive their dues from one source, distributed with an equal hand, their interest will be the same. And having the same interests, they will unite in the support of the fiscal arrangements of the government.” A safe asset like treasuries is a reserve for highly uncertain times. Even in times of high volatility, treasuries are traded in deep financial markets. Foreigners, in particular, are willing to hold treasuries as safe haven instruments. As a result, the government pays low interest rates on her borrowing. The benefit accruing is reflected in real interest rates on treasuries remaining below the global economy’s growth rate. To wit, r<g. The appreciation of treasuries in flights to safety benefit bond holders.
“Europe wishes to issue eurobonds without eurotaxes. They should read Hamilton.”.
member states are obligated under EU law to contribute according to their GNI to the European Commission. These contributions are legally binding and used to pay off NGEU loans.
Sounds like euro taxes to me, no?
Perfect timing as usual, John. I read The House of Rothschild just before I came out to see you and the rest of The Goodfellows live, and as soon as I finish “Secrets of the Temple”, I’m diving headfirst into “The Hamilton Scheme” to see what all the hu-bub is about….
When did the Federal government begin deficit spending as a standard practice? Is there not a point when borrowing money will collapse a nation? Just asking!