Cliff Lee is negotiating a new contract. One negotiating issue is "Does he get 6 years or 7 years?".
When you consider inflation, $20M seven years from now is worth a *LOT* less than $20M right now.
Assuming 10% inflation, 0.9^7 = 0.48. With 10% inflation, the 7th year of the contract is worth less than half current money.
Assuming 20% inflation, 0.8^7 = 0.21. With 20% inflation, the 7th year of the contract is worth approximately one fifth the value of current money.
Assuming 30% inflation, 0.7^7 = 0.082. With 30% inflation, the 7th year of the contract is wroth less than one tenth the value of current money.
If you look at the price of gold, silver, or other commodities, true inflation is 20%-30% or more.
Instead of accepting a 7th year on the contract, Cliff Lee could ask for a higher salary and fewer years. If he invested the difference in gold or silver, a shorter contract with higher salary per year is worth more than a longer contract.
Cliff Lee and his agent aren't considering true inflation, when they wrangle for a 7th year. The club's owners are almost definitely considering inflation. (However, many businesses aren't seeing their income rise with true inflation. As the economy collapses in hyperinflation, businesses will see their income rise slower than true inflation. Still, a professional baseball team has a State-backed monopoly. They get to borrow at preferred rates of only a couple percent. They get the government to build them a stadium, paid with tax-exempt bonds and subsidized by other taxes.)
When you account for true inflation, a long-term fixed-salary contract is worth less than it seems. Really, you should use a "gold clause". If you're going to get paid $15M seven years for now, you should instead ask for whatever 1000 ounces of gold is worth in seven years.
When the President and Congress defaulted on the gold standard, the declared that gold clauses were illegal. If someone included a gold clause in a contract and instead paid the FRN-equivalent, you could not sue them for breach of contract.
I tried looking up the law. It wasn't clear if "gold clauses" were re-legalized, after gold ownership was declared legal again. I don't know of any actor or celebrity who included a "gold clause" in a long-term contract. You could ask for a gold clause in a contract, but you may not be able to later sue for breach of contract.
Another interesting point is what happened to A-Rod. He had "deferred salary". When the Rangers declared bankruptcy, he lost a lot of that money. If you sign a long-term contract with the team, you are an unsecured creditor, if the team later declares bankruptcy.
When you consider true inflation, the 7th year of a long-term contract is worth a *LOT* less than it seems.
Sunday, December 12, 2010
Cliff Lee And The Time Value Of Money
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4 comments:
Yes, gold clauses are unenforceable. This means that you may pay an online dealer your FRN points to buy some gold bullion, only to find out that they are going to send you FRN points back. Or if you had a long position on gold, or if you had any kind of "paper" gold "you could fold", you will receive gold bullion, unless your purchase is very insignificant by itself or in consideration with others of the same timing.
The reason for this, is that gold is still illegal. Yes, it is "kind of" legal, but that is the whole point: "not really legal".
If it was, then the short would not be able to operate to bring down the price of gold. Anyone could have demanded delivery. You can demand delivery - and be paid in bullion, but if too many demand delivery - they will be paid in points. Exceptions only prove the rules.
Why keep the gold price down? Because, by paying out for oil in gold bullion, we are able to maintain the appearance of an empire, but gold needs to be pretty cheap for us to do that.
Maintaining an empire means that any time you walk in the store and it has plenty of food nicely laid out but the store is empty, - you are seeing the empire living standard: "Abundance without supporting vigorous demand". Empires maintain that by violence, - the take it from others, who, on the balance live in dirt. Post empires pay dearly to maintain only the appearance, - they empty the country by their business, not make it wealthier.
So, to legalize gold is to allow gold clauses, is to lose control on gold price, is to not be able to hide partial bullion payment and allow oil to become visibly expensive, is to initiate all other adjustments in price structures of everything else, is to unhide the price consequences of decades of inflation, is to lose reserve status, is to invite trillions of exported dollars to come back at once, is to end everything with a bang.
But, not all people in power converted everything they stole to gold bullion yet! So, to end everything now is to risk that the power structure will be changed as a result of dollar collapse. Some rich might become poor and some poor might become rich.
Instead, we will drag our feet, until every rich person converts their lot to gold, and at the same time, every poor one is completely wiped out. This will assure that no matter the perturbations, the power structure will remain intact with all the connections and mutual dependency.
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My post is too large? It's less than a page!
ok I post in halves:
Yes, gold clauses are unenforceable. This means that you may pay an online dealer your FRN points to buy some gold bullion, only to find out that they are going to send you FRN points back. Or if you had a long position on gold, or if you had any kind of "paper" gold "you could fold", you will receive gold bullion, unless your purchase is very insignificant by itself or in consideration with others of the same timing.
The reason for this, is that gold is still illegal. Yes, it is "kind of" legal, but that is the whole point: "not really legal".
If it was, then the short would not be able to operate to bring down the price of gold. Anyone could have demanded delivery. You can demand delivery - and be paid in bullion, but if too many demand delivery - they will be paid in points. Exceptions only prove the rules.
Why keep the gold price down? Because, by paying out for oil in gold bullion, we are able to maintain the appearance of an empire, but gold needs to be pretty cheap for us to do that.
part 2
Maintaining an empire means that any time you walk in the store and it has plenty of food nicely laid out but the store is empty, - you are seeing the empire living standard: "Abundance without supporting vigorous demand". Empires maintain that by violence, - the take it from others, who, on the balance live in dirt. Post empires pay dearly to maintain only the appearance, - they empty the country by their business, not make it wealthier.
So, to legalize gold is to allow gold clauses, is to lose control on gold price, is to not be able to hide partial bullion payment and allow oil to become visibly expensive, is to initiate all other adjustments in price structures of everything else, is to unhide the price consequences of decades of inflation, is to lose reserve status, is to invite trillions of exported dollars to come back at once, is to end everything with a bang.
But, not all people in power converted everything they stole to gold bullion yet! So, to end everything now is to risk that the power structure will be changed as a result of dollar collapse. Some rich might become poor and some poor might become rich.
Instead, we will drag our feet, until every rich person converts their lot to gold, and at the same time, every poor one is completely wiped out. This will assure that no matter the perturbations, the power structure will remain intact with all the connections and mutual dependency.
I have "comment moderation" enabled, to keep out spammers.
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