I was talking about profit margin, I thought it was evident. In fact, you are very hypocritical in your answers. At first you imply that businesses should have profit margin above nominal interest rate to be considered as profitable, since they could get there by just doing nothing. Then, when I point it out that you won't be able to get there since you can't eat at the money lenders interest (what you call real interest), you switch topics and start talking about risk-free financial instruments such as government bonds. But, as it turns out, in half of the cases these assets yield interest well below inflation, you again backpedal this issue and try to ridicule the facts through intimidating numbers. This won't work.
No, what I'm saying, what I'm repeating, and what you don't seem to understand, although this is very elementary in every form of business, is that money that is used on time A, and made only available again on time B, has a cost, equal to the interest rate times the amount of money, times (B - A).
That has nothing to do with inflation or deflation. It is the fact that that value is blocked during that time in whatever you spent it on.
Now, what interest rate to pick exactly is a point of discussion: is it the savings account rate, the "risk free interest rate", or is it the best possible loan rate you could get, that can be discussed, but doesn't alter the principle.
If you spend an amount of money X at time A in order to produce, to only get it back at time B when you sell your stuff, then the COST of that "frozen" amount of money equals s * (B - A) * X, and it is a cost, just like the cost of using electricity or the rent or whatever.
Look up
http://en.wikipedia.org/wiki/Discounted_cash_flow and
http://en.wikipedia.org/wiki/Time_value_of_moneyThese are very elementary concepts, you know.
Consider no inflation/deflation, and an interest rate of 5% (whether this is on a savings account, the best loan you can get, or the "risk free interest rate").
Suppose, case A, that you spend today $1000,- and that you will sell your product for $1200 in a year from now.
Using the method of discounted cash flow, that $1200 a year from now has to be reduced by the interest:
$1200/(1.05) = $1143.-
The value of selling something for 1200 in a year is worth 1143 today.
And you are spending 1000 today. So the value of your undertaking is $143,-
Suppose now, case B, that you spend $10 000 000 today, and that you will sell your product for $10 000 200 in a year from now.
Using that method again, 10 000 200 a year from now is worth (10 000 200 / 1.05) = 9523809 today.
But you are spending 10 000 000 today. So the value of your undertaking is - $476 190.-
You're making a loss of half a million almost !
Now go and study "discounted cash flow" and "time value of money". I'm not going to explain this basic concept again, 10 times in a row.
I'll just copy part of the Wiki example, that is almost exactly the same as the examples I'm using here:
To show how discounted cash flow analysis is performed, consider the following simplified example.
John Doe buys a house for $100,000. Three years later, he expects to be able to sell this house for $150,000.
Simple subtraction suggests that the value of his profit on such a transaction would be $150,000 − $100,000 = $50,000, or 50%. If that $50,000 is amortized over the three years, his implied annual return (known as the internal rate of return) would be about 14.5%. Looking at those figures, he might be justified in thinking that the purchase looked like a good idea.
1.145^3 x 100000 = 150000 approximately.
However, since three years have passed between the purchase and the sale, any cash flow from the sale must be discounted accordingly. At the time John Doe buys the house, the 3-year US Treasury Note rate is 5% per annum. Treasury Notes are generally considered to be inherently less risky than real estate, since the value of the Note is guaranteed by the US Government and there is a liquid market for the purchase and sale of T-Notes. If he hadn't put his money into buying the house, he could have invested it in the relatively safe T-Notes instead. This 5% per annum can therefore be regarded as the risk-free interest rate for the relevant period (3 years).
Using the DPV formula above (FV=$150,000, i=0.05, n=3), that means that the value of $150,000 received in three years actually has a present value of $129,576 (rounded off). In other words we would need to invest $129,576 in a T-Bond now to get $150,000 in 3 years almost risk free. This is a quantitative way of showing that money in the future is not as valuable as money in the present ($150,000 in 3 years isn't worth the same as $150,000 now; it is worth $129,576 now).
