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Michal Kalecki: "I have found out what economics is; it is the science of confusing stocks with flows". Can we not have financial journalism with apples-to-ora

by chalst 6y ago

Michal Kalecki: "I have found out what economics is; it is the science of confusing stocks with flows". Can we not have financial journalism with apples-to-oranges comparisons like "Nonfinancial private sector debt alone now makes up 165% of the entire world's economic output". The lead paragraph has "well beyond what economists have called untenable in the past", without commenting on the fact that this swiftly abandoned consensus about unsustainable levels of debt was based on the incompetent analysis of Reinhart and Rogoff. (cf. https://en.wikipedia.org/wiki/Growth_in_a_Time_of_Debt https://en.wikipedia.org/wiki/Growth_in_a_Time_of_Debt ). There might be a real issue here, but this is bad reporting.

cs702 6y ago
No one is comparing anything. Computing ratios of stocks (balances) to annual flows is standard procedure. We do it for countries (debt/annual gdp is a commonly used ratio), for companies (debt/annual EBITDA is a commonly used leverage ratio), and for individuals (household debt/annual income is a commonly used ratio).
- chalst 6y ago
  The dimensionless %age terminology is misleading (hence the Kalecki quote) but I agree standard: it would make the difference in kind clearer to give this in terms of time, say days, but I am not going to object every time I see this. But to use metaphors like saying a class of debt "makes up" GDP is magnifying the confusion and not the kind of thing a financial journalist should be writing.
  - cs702 6y ago
    > The dimensionless %age terminology is misleading These ratios are not percentages; they're measured in years = [balance in dollars] / [flow in dollars / year], by convention. In the case of households, debt/income gives you a rough estimate of how many years of income it would take to pay all debt, with everyone understanding that not all income can go to pay debts. The ratio is a rough measure of debt service capacity, measured in years. In the case of businesses, debt/EBITDA gives you a rough estimate of how many years of operating cash flows would take the company to pay all debt, , with everyone understanding that not all operating cash flow can go to service debts. The ratio is a rough measure of debt service capacity, measured in years. In the case of governments, debt/GDP it gives you a rough measure of how many years of output the entire economy would have to produce to match the balance of public debts, with everyone understanding that economic output can never be taxed at 100%. The ratio is a rough measure of debt service capacity, measured in years.
    - chalst 6y ago
      In journalism, things like price/earnings are usually given dimensionlessly, even in quality newspapers like the FT. E.g., Tesla was a red-hot stock even before the coronavirus crisis, boasting a forward price/earnings ratio — a common measure of the value the market puts on a business’s future profits — of 75 times at the start of 2020. in https://www.ft.com/content/0158a15b-52e7-4270-9ab3-4f6934b931c3 https://www.ft.com/content/0158a15b-52e7-4270-9ab3-4f6934b93...

by chalst 6y ago

cs702 6y ago

No one is comparing anything. Computing ratios of stocks (balances) to annual flows is standard procedure. We do it for countries (debt/annual gdp is a commonly used ratio), for companies (debt/annual EBITDA is a commonly used leverage ratio), and for individuals (household debt/annual income is a commonly used ratio).

chalst 6y ago
The dimensionless %age terminology is misleading (hence the Kalecki quote) but I agree standard: it would make the difference in kind clearer to give this in terms of time, say days, but I am not going to object every time I see this. But to use metaphors like saying a class of debt "makes up" GDP is magnifying the confusion and not the kind of thing a financial journalist should be writing.
- cs702 6y ago
  > The dimensionless %age terminology is misleading These ratios are not percentages; they're measured in years = [balance in dollars] / [flow in dollars / year], by convention. In the case of households, debt/income gives you a rough estimate of how many years of income it would take to pay all debt, with everyone understanding that not all income can go to pay debts. The ratio is a rough measure of debt service capacity, measured in years. In the case of businesses, debt/EBITDA gives you a rough estimate of how many years of operating cash flows would take the company to pay all debt, , with everyone understanding that not all operating cash flow can go to service debts. The ratio is a rough measure of debt service capacity, measured in years. In the case of governments, debt/GDP it gives you a rough measure of how many years of output the entire economy would have to produce to match the balance of public debts, with everyone understanding that economic output can never be taxed at 100%. The ratio is a rough measure of debt service capacity, measured in years.
  - chalst 6y ago
    In journalism, things like price/earnings are usually given dimensionlessly, even in quality newspapers like the FT. E.g., Tesla was a red-hot stock even before the coronavirus crisis, boasting a forward price/earnings ratio — a common measure of the value the market puts on a business’s future profits — of 75 times at the start of 2020. in https://www.ft.com/content/0158a15b-52e7-4270-9ab3-4f6934b931c3 https://www.ft.com/content/0158a15b-52e7-4270-9ab3-4f6934b93...