Re: Alan's argument only about asset demands

["Alan G. Isaac" <AISAAC@xxxxxxxxxxxx>]

Paul, This is certainly the kindest treatment you've given
any of my "stories with a point" or, if you will, theoretical
arguments. I still feel somewhat unfairly treated, however.
I was always taught to ask under what interpretation a story
*can* make a person's point, while it seems to me that you
search for interpretations that invalidate the story.
Nevertheless, I hope I can clarify.

First, remove your interposed "[only?]"s.

Then assume zero carrying costs for both assets.
Say Ed McMahon just announced that you won 3rd prize,
and my scenario is what you get.

Then, don't object that this is not realistic. Just tell me
whether you would diversify. If so, then you admit that
in principle given the chance in the current economy
you would attend to the variance of real returns.

Once we have established that principle, we can discuss the
extent to which this concern can be accommodated in a
contemporary monetary economy. I will of course argue that
it can be partially accommodated.

--Alan

On Thu, 29 Feb 1996 13:46:07 -0500 Paul Davidson said:
>Alan responds to Roy that "my arguments have been only about asset demands.
>I have argued that asset demands are affected by real returns {only?]...I
>have not addressed investment which of course is complicated by firms making
>commitments in nominal terms. (Opps I almost forgot, I also argued that
>individual savings decisions are affect by real rates [only?]. But the case
>for prortfolio choics is so clear...."
>
>I think my earlier answer to Alan that until he tells us the carrying costs
>per year (in nominal terms) for each asset it is not clear that the
>hypothesized  $2000 inlfation-hedge whose nominal value ten years hence is
>expected to rise with the 10% inflation rate (with no variance) is actually
>a desireable store of value in the portfolio.  I happen to own a parcel of
>land (approximately 0.3acre)adjacent to my resdiential property. It has just
>been assessed as valued at $1800 (very close to $200 Alan). The acrage is an
>the side of a hill (and hence almost vertical). The annual  real estate
>taxes is currently $35 . Thus if I hold it for ten years it will have cost
>me $350 (assuming property taxes do not chang with inflation during the
>period), while if its nominal price rises by 10%  during that period to
>$1980 and then I sell it my net capital gain is $1980 - $1800 - $350 =
>-2.50.  If my bond (assuming its initial price is $1800 yielded only 6%
>(total) for the period and then the bond matured, I would have $1800 - $1800
>+ $108.  Thus the land hedge would have a negative nominal (and even larger
>negative ex post real) return EVEN THOUGH ITS NOMINAL PRICE KEPT UP WITH
>INFLATION  (by hypothesis) while the bond would have a positive nominal
>yield (and a smaller negative ex post real return than Alan's  perfect
>inflation hedge).  Why do I hold the land in my portfolio? Not because of
>its "real rate of return as Alan would measure it!!
>Paul Davidson
>Email: Pdavidson@xxxxxxx
>Fax:  (423) 974-1686
>Office phone: (423) 974-4221
>Home phone: (423) 573-9160
>Address: Economics Department, 523 SMC
>University of Tennessee
>Knoxville, Tennessee 37996-0550
>
>