{"id":22836,"date":"2008-05-07T19:34:00","date_gmt":"2008-05-07T19:34:00","guid":{"rendered":"https:\/\/clusterfamilyoffice.com\/blog\/?p=514"},"modified":"2008-05-07T19:34:00","modified_gmt":"2008-05-07T19:34:00","slug":"back-to-the-future-paradoja-del-tiempo-y-del-dinero","status":"publish","type":"post","link":"https:\/\/clusterfamilyoffice.com\/en\/back-to-the-future-paradoja-del-tiempo-y-del-dinero\/","title":{"rendered":"Back to the Future. Paradox of Time and Money."},"content":{"rendered":"
Most of us have at some point studied the Avogadro's number<\/a>. A constant, enormous figure relative to the number of atoms or particles existing in the infinitesimal amount of matter known as mol.<\/span> Paradoxically, it is such a large number that it might well be astronomical, giving us an idea of the relationship between atoms and the universe.<\/div>\n
\"\"<\/a>Looking back in time, this Avogadro\u2019s number gave rise to the atomic theory of matter, which in turn was based on the Brownian motion<\/span> (Robert Brown<\/a>, botanist). This name was given to the random and unpredictable path taken by pollen particles as they collided with the water molecules in which they were suspended. But don\u2019t panic \u2013 even though it might not seem like it, we\u2019re going to be talking about finance, the economy and, ultimately, money.<\/span><\/p>\n

Louis Bachelier<\/a> (photo), drawing on these Brownian motions, wrote his doctoral thesis known as The Theory of Speculation<\/a>, published in 1900 (a true trailblazer if ever there was one). He was regarded as the pioneer in the stochastic process<\/a>, an analysis that remained confined to the worlds of mathematics and science for several decades until Fisher Black and Myron Scholes<\/a> (the latter of whom was awarded the Nobel Prize in 1997) provided the decisive impetus for its financial application in 1973. Below is his famous formula for calculating the premium of an option:<\/p>\n

\"\"<\/a>The idea of these mathematicians \u2013 and, above all, these economists \u2013 was simply to bring capital from the future for use in the present. In other words, to devise a mathematical formula that would quantify how much an investor must pay today to secure the right to buy something in the future, and vice versa. In other words, how much the risk incurred by the seller is worth when setting the price of a future asset today. Black and Scholes determined this mathematically, in an almost infallible manner (sic). From there, a whole new world of investment took off, known as futures<\/span> and subsequently its endless evolution into every conceivable type of derivatives<\/span>. And so the Chicago Board of Trade<\/a> (CBOT) and the ideal breeding ground was established for the current credit bubble, exacerbated by the property market. Money and wealth ceased to belong to the realm of energy, where they were created or destroyed exclusively through productivity, and were largely transformed or changed hands. A dangerous dynamic began in which money ceased to be linked to production and started to travel through time, but only in one direction. The capacity for creating virtual wealth and for current investment became almost infinite through the globalisation of stochastic calculations. For years now, all we have had to do is look to the future and commit assets and investment potential to something we do not yet possess, because we believe ourselves perfectly capable of pricing it accurately. In the purest and wildest style Back to the Future<\/a>.<\/p>\n

\"\"<\/a>But beware: although most users of mathematical finance are unaware of this, the Brownian model does not apply correctly in times of turbulence or major crises and fluctuations \u2013 in other words, in the current climate. Risk<\/span> y Value<\/span> These are two concepts that mathematics will probably never be able to quantify precisely. There is a psychological component that is far too significant, and one that is amplified enormously by the globalisation of investment markets. To take just one example, assessing the risk of a financial institution going bankrupt within a year has nothing to do with the probability of success of that same calculation method over a 10-year period, for instance. Nevertheless, derivatives would not be inherently harmful to the system if they were used only by companies whose productivity far exceeded the premium paid for the risk margin. But this would make most people laugh financiers and investors<\/span><\/a> who parasitise (we parasitise) the economic system on a daily basis. It would be like telling the arrogant new owner of a brand-new Ferrari that he can only drive in first gear and at half throttle \u2013 in other words, not even close.<\/p>\n

Credit expansion is a diabolical tool capable of creating periods of illusory economic growth. Moreover, mathematical financial models give us a false sense of security, of being able to calculate and control risk and value. Nothing could be further from the truth, unfortunately.<\/p>\n

Until a few decades ago, the contractions and expansions of this credit led to the economic booms and crises whose cycles we have all experienced and studied. But the global use and abuse of derivatives are bringing vast sums of future money into the present, which have blown the cycles \u2013 hitherto familiar to us all \u2013 to smithereens. Consequently, the systems and theories based in one way or another on these cycles (almost all of them), which have repeated themselves for over a century, have ceased to function, either partially or entirely, since the credit bubble burst. (Mortgages have also brought in excessive amounts of money from the future, but this time in exchange for our time and vital productivity; but we\u2019ll talk about that another day.)<\/p>\n

\"\"<\/a>We may therefore see a period of recession that goes far beyond a correction of this credit and property bubble. Or else the pull of future money may be such that we see a pullback<\/span> merely a temporary situation over the coming months, and that this will cause us to rush headlong into the future for a few more years or decades. The future is more unpredictable than ever, even though we have already spent and invested their money.<\/p>\n

We will never tire of repeating that investment in instruments not directly related to production is harmful to the System, our<\/span> Economic System. But they are even more so if we feed them with money taken from the future. We ought to be able to divest from them and return them to the future, but that is not possible. Only by investing what has already been produced can we ensure that our money, gradually and through sustained effort, travels Back to the Future<\/span>.<\/p>\n