This post is meant to refer to a knol Ihave written in response to a recent question posed on the Institute for New Economic Thinking (INET) community website : “Will public deficit reduction encourage private sector growth, or undermine a needed stimulus to recovery & lead to Japan-style stagnation?” This lead me, in view of my work on BICs, to wonder whether the deficit is really the right metric to focus on and analyze the extent to which it could be misleading.
I argue that the government balance sheet, rather than its cash flow position -from which the deficit is computed - should really be what eyes are focused on. The focus on balance would have and should better focus minds on stimulating high returns investments for sustainable recovery and expansion, some of which I discuss.
BICs enter in the picture because using their methodological prescription would make reliable and practical the complex and almost canutian task of computing the values of the different items on the government balance sheet.
I am gratified that the debate INET moderating team has picked on some of my suggestions and highlighted them in the debate summary(http://ineteconomics.org/blog/inet-community-responds-deficit-debate) as: "As far as new, creative solutions to the debate, a few users, such as kongtcheu, have urged governments to invest in entrepreneurship and clean energy projects, suggesting that these investments will create jobs and growth in the future."" I meant to say more than that.
References
Kongtcheu, Phil. The Deficit Debate - BICs:Is the deficit the right metric to focus on ? And what prescriptions does this leads to? [Internet]. Version 45. Basis Instruments Contracts (BICs). 2010 Aug 25. Available from: http://knol.google.com/k/phil-kongtcheu/the-deficit-debate-bics/24v2kgtuvzk2v/30.
http://ineteconomics.org/blog/inet-community-responds-deficit-debate
Showing posts with label Deficits. Show all posts
Showing posts with label Deficits. Show all posts
Wednesday, August 25, 2010
Thursday, May 27, 2010
Easy Money, Hard Truths
I liked this piece in the times quite a lot. It is a useful refresher course on macroeconomics and articulate the deficit hawks thoughtful worries about ballooning deficits and debt. It argues fairly persuasively that the lack of apparent inflation in reported numbers might be a smoking mirror or at any rate unhealthy.
It is a fairly challenging counter argument to the "forget-about-the-deficit,-there-is-no- inflation,-expansionary-government-policies" Krugman regularly pushes in his pieces.
The weakness of this analysis in my view is that it is poorly prescriptive. Mindless belt tightening at all costs as one would would asphyxiate the economy making the current predicament even worse. Krugman pushes for expansion but in traditional sectors of the economy.
What I have failed to see in both analyses is the effort to help flow credit to start ups in the services industry who are likely to open up the new industries which are most likely to help the country grow out of its mounting liabilities. When I read about the paltry efforts to get money through the SBA, it is quite puzzling. Thomas Friedman regularly does a god job at drawing the need to focus efforts on high tech startups of the future, but again his prescription for helping flow money in a timely manner to this sector is neither refined nor well calibrated enough.
And this would get me to... BICs
References:
http://www.nytimes.com/2010/05/27/opinion/27einhorn.html?hp=&pagewanted=all
It is a fairly challenging counter argument to the "forget-about-the-deficit,-there-is-no- inflation,-expansionary-government-policies" Krugman regularly pushes in his pieces.
The weakness of this analysis in my view is that it is poorly prescriptive. Mindless belt tightening at all costs as one would would asphyxiate the economy making the current predicament even worse. Krugman pushes for expansion but in traditional sectors of the economy.
What I have failed to see in both analyses is the effort to help flow credit to start ups in the services industry who are likely to open up the new industries which are most likely to help the country grow out of its mounting liabilities. When I read about the paltry efforts to get money through the SBA, it is quite puzzling. Thomas Friedman regularly does a god job at drawing the need to focus efforts on high tech startups of the future, but again his prescription for helping flow money in a timely manner to this sector is neither refined nor well calibrated enough.
And this would get me to... BICs
References:
http://www.nytimes.com/2010/05/27/opinion/27einhorn.html?hp=&pagewanted=all
Sunday, August 30, 2009
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
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
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