The calls we have written for our kids !
Economic theories argue on whether public debt ( debt incurred by governments ) to meet the needs of exceeding expense over revenues ( fiscal deficits ) is an implicit burden on the future generation.
If large part of such debt is used for capital expenditure and raising the infra levels , investment in education and technology then future generations would benefit from it .
More like the standard wisdom of our grandfathers sowing mango tress for us to enjoy the fruits ( well unfortunately we cut those trees since we want to develop the property commercially ! )
However if the debt is incurred by us to allow inefficient transfers and conspicuous consumption then it is like a liability where benefits are incurred now , payments would come later.
But here we do not want to discuss the aspect of debt or deficits incurred by the governments. But today want to discuss on something that we ourselves are responsible for doing.
When we reflect on how companies like Amazon India , Flipkart of other e-commerce giants would make money in India , the argument is , they focus on growth rather than profits. They offer discounts which make some things I always wanted far within my reach. So they enable converting my wants into demands. A dual income middle class with considerable disposable income loves to consume and here we have a super powerful and instant connect. And this generation enjoys the benefit of the deals , making the offerings an indispensable part of our lives.
Now let us look at this from the angle of the companies providing these ........ considerable part of their valuations ( already rich in some cases ) come from the fact that real options , options to expand in new markets , option to expand into new business lines like logistics etc. are built into them.
Effectively the markets perceive that there are " call " options into the business strategies of these companies which are not reflecting in current and projected cashflows out of a pure DCF type valuation. Each call option however comes at a price , an upfront payment and these companies well recognize this and are paying these call premiums upfront to " us " by offering us discounts that take prices of these products far below than what we might be ready to pay for them ( generating large consumer surplus ) .
So far ok , but then what does it make " us " ? We are on the other side of the calls that these companies have bought , who have enjoyed the call premiums upfront ... We are the call writers. We have written the calls that are already built into the valuations of these companies. In future when these companies seek " margins " rather than market growth and exercise these calls , they would do so by reducing these consumer surplus to zero and restore parity. So our future generations would no longer enjoy these extraordinary discounts but at the same time they would no longer have the option to NOT enjoy these products since the calls we have written would effectively have made it obligatory for them to enjoy these products ! ( imagine doing our kids homework without google and you would know what obligatory i am talking of )
A lot has been said on the same lines on climate change etc. but that is something of a classic trade-off between current and future where optionality is not at play so much. Maybe becoming a super consumer is also similarly probably built into us !
Should our generations not enjoy the benefits given to us and constrain our consumption... no ... we might not do that. But it is in our hands to hedge this exposure against super consumption puts right from now. Remember each option can be hedged.
How ? By shifting our focus on innovation to beyond just consumption driven needs. So along-with diverting a lot of RnD from just data mining for consumption trends , we must focus our innovation to create some other externality that would help the future generations. In this way we have hedged the exposure to the consumption calls we have written !
Thanks !
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