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And the much loathed "National Debt", F, is a positive item until overwhelmed by the bezel, the perceived risk of which is represented by R. In effect, the thing that most on the right wing hate is the possibility that, collectively, the bezels will overwhelm and kill that which some are embezzling. This COULD be a positive and shows that much of the problem is the result of a total lack of understanding of national accounting by most people, including some accountants. (The local teabagers are led by an accountant!)

What most do not understand is that it is their largest allies that are doing the most embezzling and that the hated national debt actually stands for the monetary value of the society in which they live. How patriotic would it have been to loathe War Bonds during WW II? Not only did they help finance victory, they helped underwrite the postwar economy.

What should be loathed and prosecuted is the fraud that has been allowed to pollute the national debt and the whole society, but, because government has been identified as the problem in the minds of so much of the public, there has been insufficient outrage at the actions of the fraudsters.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 10:13:27 AM EST
[ Parent ]
And the much loathed "National Debt", F, is a positive item

Well, the sovereign debt also carries a counterparty risk (though legal tender laws complicate the analysis somewhat on this point...), which is properly accounted for as a part of R. It is perfectly possible for the sovereign to engage in a debt binge to the point where F0 contributes a significant fraction of R. If the risk of sovereign default is underestimated, this is effectively equivalent to an unjustified increase in the bezzle and can lead to precisely the same situation of systemic insolvency.

until overwhelmed by the bezel, the perceived risk of which is represented by R.

No, R is the aggregate cost of default risk. The bezzle is different, and the bezzle isn't always bad (if it were that simple, you could have a computer run the central bank, like Friedman said he wanted...).

The bezzle can be perfectly justified - take the balance sheet of a major medical company, for instance. They have physical assets, financial assets, intellectual property, etc., but their biggest asset does not show up at all: Their organisation - their trained cadres of specialists working together in a coherent institutional framework. Why does this not show up in their book value? Well, because it has no liquidation value. Never the less, such intangible assets are very much real. In fact, the bezzle is the entire reason for keeping the going concern a going concern rather than liquidating it.

But it's impossible to device an objective way to compute the proper size of the bezzle from first principles, because (among other things) the bezzle includes expected future earnings, and there is no way to definitively state that any given expectation is justified. So while it is possible to say whether any given bezzle is clearly far too big or small, providing a precise number for its value involves a component of subjectivity. Part of the mechanism in a speculative boom is that this subjective valuation is exploited to substitute mysticism and glamour for reasoning and substance.

It's this ambiguity that makes economics interesting. And, incidentally, what makes precision in economics "a mock precision if we try to use such partly vague and non-quantitative concepts as the basis of our quantitative analysis."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 18th, 2010 at 11:28:33 AM EST
[ Parent ]
You are equating what is normally called "intangible assets" with the "bezel". I presume this is deliberately provocative. Nitzan and Bichler include a term for "hype", a coefficient that accounts for differences between "actual" value and the value that the market assigns to assets when they are capitalized and discounted to present value. The hype can be above or below unity.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 12:13:48 PM EST
[ Parent ]
re: "You are equating what is normally called 'intangible assets' with the 'bezel'."

That's OK and should not be the least controversial.

An intangible thing ("object") is foremost an idea. It is a mental or intellectual representation of some fact ("event") that is imperceptible to human senses which is merely the interface of the environment in which one acts. It is the thing that has yet to occur to objective measure. The unuttered idea is a fact and an intangible object.

The attribute common to yet that differentiates tangible and intangible things is time; that which is present and that which is not present.

Any demand for or claim to a future state of something, intangible or tangible object referent, is an intangible object.

The ideology of GAAP attempts to describe the essential subjectivity of business practices by enforcing applications of recognition to transaction events and objects.


Diversity is the key to economic and political evolution.

by Cat on Sun Jul 18th, 2010 at 03:11:30 PM EST
[ Parent ]
You are equating what is normally called "intangible assets" with the "bezel". I presume this is deliberately provocative.

Deliberate, yes. Provocative, perhaps. Deliberately provocative, no.

The reason that I lump together justified and unjustified expectations of future gains is that, in the snapshot that the balance sheet represents, there is no way to tell the two apart in any manner that is both objective and precise at the same time. Nor is it relevant to the phenomena that I designed the model to analyse.

Take a company that is leveraged 4:1 and capitalised at 150 % times its liquidation value on the expectation of future earnings - that is, it has a bezzle of +50 % of its liquidation value and an equity of +37.5 % of its liquidation value. So if its bezzle shrinks below +37.5 % of its liquidation value for whatever reason, its creditors will start liquidating it in order to avoid being left as the last creditor holding claims on an insolvent institution.

The original bezzle could have been perfectly justified, based on what everybody knew or could reasonably know at the time. The new bezzle could also be completely justified, due to changes in market conditions. Or one or both could be entirely due to the overactive imagination of stock market speculators. That doesn't matter, because all that the creditors see is that the company's stock just went to zero, which is a signal for them to start sending out margin calls.

Or take a company that, due to the prevalent discount rate on the money markets, has a negative bezzle - that is, the liquidation of its plant and the sale of its patents would give more money than the money markets are prepared to pay for the future cash flow that they believe the company will generate. In that case, the company will be targeted for liquidation by corporate raiders. And it really doesn't matter whether the negative bezzle is justified on the basis of the company having an unsound business model, or the negative bezzle is due to unjustified required rates of return on money or even due exclusively to overactive pessimism on part of the stockholders.

(Of course the story about corporate raiding is a little more complicated, because it's also a story of corporate raiders exploiting loopholes in the law to liquidate companies without paying out their deferred expenses, like pensions, in full. Obviously, the ability to shaft creditors during the liquidation of an otherwise solvent company creates an incentive to liquidate perfectly sound going concerns.)

So separating the bezzle into a justified part based on brand recognition, organisation, business models and so on versus an unjustified one based on hype, glamour and mysticism does not, I think, add sufficient analytical power to the model to compensate for the demarcation problem it introduces.

Nitzan and Bichler include a term for "hype", a coefficient that accounts for differences between "actual" value and the value that the market assigns to assets when they are capitalized and discounted to present value. The hype can be above or below unity.

How do they determine the "actual" value? The actual value of an asset depends on the expectations, plans and strategies for the future, as well as the applied discount rate. Now, the future can be guessed at, studied or planned for, but the discount rate is (in part) an explicitly political parameter that has no objectively true value.

And there is another advantage of separating the intangible assets from the physical assets: If you want to model the cascading collapse during a financial panic, explicit bezzles are more illustrative and mathematically convenient (or at least I think so) than dealing with multipliers on asset values.

Additionally, it is possible to be an economic actor with no tangible assets - a company that deals entirely in financial assets and rents its buildings and equipment would have no physical portfolio to apply the multiplier to. Yet presumably it has a positive bezzle - if it did not, we could not expect it to remain a going concern, per the discussion of corporate raiding above.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 18th, 2010 at 04:13:11 PM EST
[ Parent ]
How do they determine the "actual" value?

If I recall correctly, they don't try. They do note the various factors that can affect that value, not least the political, economic and social power to favorably manipulate popular perception.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 04:31:39 PM EST
[ Parent ]
"unobserved inputs"
(intangible objects)

Diversity is the key to economic and political evolution.
by Cat on Sun Jul 18th, 2010 at 07:52:10 PM EST
[ Parent ]
That is why such a store is placed on the value that the most recent fool has placed on an asset, the "market" price.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 04:33:27 PM EST
[ Parent ]
"observable inputs"
are tangible objects,
a transaction price
paid
with cash

Diversity is the key to economic and political evolution.
by Cat on Sun Jul 18th, 2010 at 07:53:36 PM EST
[ Parent ]

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