One of these is not like the other

Brad DeLong asks “Where are the stabilizing speculators?

We know why people don’t turn around and become suppliers of liquid cash money when the money stock contracts: they can’t, for nobody else’s liabilities are good as payment for transactions in currently-produced goods and services. But surely Berkshire Hathaway or Microsoft or Northrup-Grumman could have sold lots of bonds at attractive values. Why didn’t they?

My answer: Microsoft is not a financial corporation. They do not borrow in order to lend again, they borrow in order to purchase productive capital. Assuming that Microsoft has purchased all the capital it needs, the question becomes one of leverage, or debt to equity ratios.

Continue reading “One of these is not like the other”

One of these is not like the other

Firm Leverage and Price Stickiness, Part 2

This is a post in response to some of the issues raised by SRW.

I appreciate the feedback.

First, I consolidated leverage by industry (e.g. 5 digit NAICS industry). Next, I looked only at downward deviations in price — e.g. I computed stddev( .5abs(x) – .5x), where x was the the month over month percent change in price for each BLS 5 digit price index.

Therefore now we have mappings between industry leverage, and the downward standard deviation of percent changes in price.

Finally, I weighted everything by equity, so that small industries (often with high leverage) do not contribute so much.

Continue reading “Firm Leverage and Price Stickiness, Part 2”

Firm Leverage and Price Stickiness, Part 2