The Greenback Effect -Till Debt Does its Part -" Going where the Joneses Go Arguments"

Op-Ed Contributor - The Greenback Effect - NYTimes.com


This piece by virtue of who its author is was bound to be interesting and of interest to many.
Likening the Greenback effect to the Greenhouse effect is indeed an expression of intense intellectual alertness and the case against runaway deficits just like the case against runaway toxic gas emissions is sensible enough.

The larger issue with the piece is that the wrong assumption that GDP equals assets on the government balance sheet. Absent a demonstration of that essential link, the entire case falls apart.

It also brings back to mind an equally short-sided line heard a lot in this crisis that it is a fall in savings and a high level of debt that have pushed the US on an unsustainable path. This is so WRONG. As Mr. Buffett rightly says, "I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt." The same goes with individuals. The issue for individuals as with corporations or governments is HOW TO VALUE ASSETS OR LIABILITIES. It is not a simple question and there are a lot of ways to seem reasonable and be very wrong about it. It is an issue that requires deep analytical skills and an ability to creatively understand handle issues that far outstrip the intellectual arsenal of the winners of earlier generations. Those earlier winners are precisely those at the apex of their intellectual influence, yet they simply do not measure up to the scope of the issues. For example Paul Krugman’s recent Op-ed piece "Till Debt Does Its Part" while correctly making the argument that debt or the deficit are not the issue some seem to make it to be, still rely on the same fallacious debt or deficit to GDP ratios and uses historical and international comparisons for calibration purposes. To me this is still a going where the Joneses go argument.

This issue does is not limited to policy makers and analysts, but it extends to the most respected mathematicians of finance.


Because we currently use inefficient and unstable methods for these valuations (Buffett here equates GDP with the government balance sheet),there is a lot of instability in those valuations which results in unwieldy swings that bring us so often close to the abyss. This is where the robustness in the BICs valuation approach will in time be seen as providing the best framework for stable and dependable valuations of all types of assets thereby substantially eliminating volatility in assets valuations.

If government assets were properly valued, it could in fact responsibly borrow without ever minding the deficit, the size of the GDP, as long as the assets created with the monies borrowed could be reliably shown to be worth even more.

Reference:

http://www.nytimes.com/2009/08/19/opinion/19buffett.html?scp=1&sq=The%20greenback%20effect&st=Search

http://www.nytimes.com/2009/08/28/opinion/28krugman.html?em

The Investment Professional - BICS, the PPIP, and Expectations-Based Risk Management

The Investment Professional - BICS, the PPIP, and Expectations-Based Risk Management: "Smoke and Mirrors
BICS, the PPIP, and the Fallacies of
Expectations-Based Risk Management"

http://www.theinvestmentprofessional.com/vol_2_no_3/abstract-bics.html

Check this out. I'll just update with the following comment:

"With signs of impending economic peril dissipating, the PPIP looks to become one of the greatest government programs that never were.Yet the structural tools used in the analysis here and the core criticisms they lead to makes it a Gedankenexperiment whose lessons are still very worth learning."