Archive for the ‘Government Economic Policy’ Category

Thanks to Bob Jensen and Jim Mahar (FinanceProfessor.com) for alerting us to a video by Michael Burry, MD.  On April 5, 2011, Burry spoke at the Vanderbilt Medical School (his alma mater).  Here is a short (31 min) recording.

Debit and credit – – David Albrecht

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According to my naked eye, the U.S. is afflicted with significant inflation.  Food prices are up.  Gasoline and transportation prices are up.  Healthcare prices are up.  Clothing prices are up.  Entertainment prices are up.  Higher education tuition is up.  Everything is up, except my mortgage payments.  These are increasingly difficult to pay given that higher education wages have remained constant for the past ten years and I have less left over at the end of the month.

But is inflation large enough to impact the interpretation of financial statements?  As I discuss in this essay, the answer is YES!

To address the issue of the impact of inflation on financial statements, we need a not too biased estimator of the rate of inflation.

According to information released by the Bureau of Labor, inflation (as measured by the CPI) has been relatively low over the past ten years, usually averaging 2-3% per year.  I have always been skeptical of these reports, for three reasons.  First, the reported government figures don’t agree with my perception of the change in prices.  I think that inflation has been higher.  Second, the U.S. government has significant incentives to under report inflation.  A low reported inflation rate means that government transfer payments (such as social security) are minimized.  Also, a high reported inflation rate has adverse impacts on the ruling party’s (Republican or Democrat) to remain in power.  Third, I’m aware that the methods used to calculate the CPI have changed during the past 30 years.  For example, volatile changes in prices are minimized in the weighted average index.

So, how high has been inflation using non-government supplied computations?  Such a computation would remove the government bias, but possibly introduce new biases.

I use Shadow Government Statistics, which is owned by American Business Analytics & Research LLC, a company founded by John Williams.  It uses his methods to recompute the rate of inflation using the same government methodologies in place in 1980.  According to his data, inflation has been averaging about 10% per year for at least a decade.

credit: Shadow Government Statistics.

Inflation data provided by SGS feels about right to me, and I view it as credible.  If inflation is this high (≥ 10%), then analysis of financial statements should be based on inflation adjusted numbers.  For example, if a company has been reporting an upward trend in revenues, adjusting the numbers for constant dollars might reveal a real decreasing trend in revenues.

Moreover, we need guidance from accounting standard setters as to the principles to use in financial statement preparation so that inflation adjusted numbers can be used for comparisons.  Unfortunately, this is not about to happen anytime soon under the leadership of Hoogervorst (IASB) and Seidman (FASB), because something this useful would run counter to government policy.

Never-the-less, if you are a financial statement analyst, you should be performing some inflation adjustments.

For guidance, you might refer to a copy of the obsolete Statement of Financial Accounting Standards #33 or the outdated IAS #29 (which predates IFRS).   Be aware that the IAS standard doesn’t require inflation adjusted information until inflation hits 100% over a three year period (about 26% per year).

Debit and credit – – David Albrecht

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Andrew Ross Sorkin became solidified his position as a celebrity reporter when he wrote, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves.

Even if you haven’t read the book, you’ve been affected by it.  The story told in Sorkin’s TBTF has informed and influenced actions and events during the past two years. This summary is from publisher:

Andrew Ross Sorkin delivers the first true behind-the-scenes, moment-by-moment account of how the greatest financial crisis since the Great Depression developed into a global tsunami. From inside the corner office at Lehman Brothers to secret meetings in South Korea, and the corridors of Washington, Too Big to Fail is the definitive story of the most powerful men and women in finance and politics grappling with success and failure, ego and greed, and, ultimately, the fate of the world’s economy.

Although previously available in snippets on YouTube, the complete lecture by Andrew Ross Sorkin to the Foreign Policy Association on November 2, 2009 is now available in its entirety.  It is well worth viewing.

This lecture is about three themes.  It is “… about the process, how this book was created  … about how and why these people would ever tell me some of the things they did.”  It is also about “… the story .. and where the surprises are.”  And finally, it is about “… some of the lessons learned, which more than anything was the goal when I started this project.”

Debit and credit – – David Albrecht

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The Summa is an accounting blog.  You know, debits, credits, accounting rules and auditor problems.

Sometimes, though, economic issues seep through.  Thanks to an alert contributor at AECM (the e-mail listserv for accounting professors), I have been watching a really good animated video explaining Quantitative Easing.  The video, uploaded by Youtube contributor MALEKANOMS.


It seems as if the Fed and its QE programs is more fouled up than the audit model, the Big-4 lock on the audit industry, the SEC and its management of American accounting standards, and the International Accounting Standards Board.  Of course, we all know that these are fouled up beyond are imaginable recognition.

Debit and credit – – David Albrecht

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