Hi Jason,
I am happy that the piece triggered a thoughtful process!
Regarding your questions - and what follows is just my opinion of which we all have one - here are my thoughts:
* You wrote, "In my mind, growth does not come without risk." On this we are in total agreement. In fact, take a look at part I of this extended risk-free rate exploration and you will see that is the essential beating heart of the discussion. http://blogs.stage.cfainstitute.org/investor/2012/03/20/rethinking-the-…
* As is made clear in the first piece I believe there is no such thing as "risk-free" in a universe with action. However, I also believe that the concept of a bedrock rate of return is a good one. Because you and I think about this core rate differently (you: time value of money, and me: the return that I can count on) we have different preferences for a proxy.
* Regarding the 'time value of money' concept. To me this is essentially the minimum opportunity cost. That is, what rate of return will induce me to surrender my preferred asset (fungible cash) for an idea (illiquid, narrolwy defined) for how to invest this cash. At a base level I feel that I will not surrender my cash unless someone can earn for me a rate of return greater than my own ability to productively deploy my assets/improve my life.
* One apparent difference in our thinking is that you seem to indicate in your writing that you think of rates of return through-and-through and top-to-bottom as undulating, dynamic, and reflective of current economic forces. I am inferring this from your example of, "...in a stagflationary economy, productivity growth would be declining while inflation was increasing."
Several points about this:
1) I think of rates of return as a combination of systemic (undulating) factors, non-systemic (undulating) factors, AND permanent factors (bedrock).
2) Inflation, stagflation, the current yield on a constant maturity 10-year Treasury, LIBOR, et. al. are all measures of state changes reflective of temporary (undulating) factors.
3) Embedded in use of the preceding as proxies for a bedrock rate of return is what I feel is a hidden, and flawed assumption, namely, an assumed time-scale. Put another way, they assume the current state of undulating factors will persist into the future. Yet, as we know undulating states do not persist indefinitely; i.e. there is mean reversion. Not only that, but lurking in the background is what I will call a traders' mentality. That is, a mindset that sees no alternative to buying the current state of the world. Whereas, an investors' mentality allows someone to decline purchasing the current state of the world. That is, "I don't like stagflation and will invest elsewhere, OR I will not invest at all."
4) Another possible hidden influencer is the dreaded investment mandate. That is, "I must invest in the assets dictated by my charter;" or "My clients hired me to manage equities, not cash;" or "Consultants expect me to generate alpha relative to a declining benchmark;" or...something else having very little to do with capital preservation and capital creation.
5) If you allow for a permanent factor in your required rate of return - for me, long-term (25 years at least) multi-factor productivity - then it allows you to use your rate of return to assess ALL investments, not just liquid investments like stocks, bonds, ETFs, REITs, etc., but also farm land, art, a contract to build a new house, and so forth. That is, if I cannot expect a prospective investment to pay me the aggregate innovation of an economy over the long-term, I will decline the investment. I now have a measure, not just reflective of the current state changes, but a rate that is a bit more of a bedrock and reflective of a constant need for an inducement to exit a liquid state into an illiquid. Here is an example of an application: If I see a negative nominal yield German schatz I can say to myself, "That's ridiculous and I will decline to invest because I know that the German people, or at least some people and in some economy on the planet will be working hard to improve/innovate their lives and that's what I want to, at a minimum (i.e. bedrock) to capture by investing."
6) Because a world with action is a risky world and so long as there is fiat money the bedrock rate is always positive, regardless of its magnitude. This is to compensate me for moving from liquidity to illiquidity.
Last, can you imagine a long-dated call option being created by an investment bank that tracks various time-scaled measurements of multi-factor productivity? If so, then this concept is investible, fungible, marketable, observable.
Best to you, too!
Jason