1/7
Great article, but while I definitely agree with @RobinWigg that in order to strengthen the robustness of the economy, governments should gradually eliminate the tax deductibility of interest payments, I think he is a little harsh on...
ft.com/content/87efe5…
Great article, but while I definitely agree with @RobinWigg that in order to strengthen the robustness of the economy, governments should gradually eliminate the tax deductibility of interest payments, I think he is a little harsh on...
ft.com/content/87efe5…
2/7
the Modigliani and Miller framework, which is a deeply insightful one. It shows that debt doesn’t matter to economic value creation only if we ignored the tax deductibility of interest and bankruptcy costs (later adjusted to more general “financial distress” costs).
the Modigliani and Miller framework, which is a deeply insightful one. It shows that debt doesn’t matter to economic value creation only if we ignored the tax deductibility of interest and bankruptcy costs (later adjusted to more general “financial distress” costs).
3/7
The problem is that economists and analysts never really understood how financial distress costs are incurred by businesses (let alone by sovereign borrowers) and how they are self-reinforcing. They occur as agents change their behavior in response to changes in the...
The problem is that economists and analysts never really understood how financial distress costs are incurred by businesses (let alone by sovereign borrowers) and how they are self-reinforcing. They occur as agents change their behavior in response to changes in the...
4/7
probability of default (or in the case of sovereigns, to changes in uncertainty over how debt-servicing costs will ultimately be allocated). Once debt levels are high enough, any adverse shock that can increase uncertainty will set the company off into a spiral in...
probability of default (or in the case of sovereigns, to changes in uncertainty over how debt-servicing costs will ultimately be allocated). Once debt levels are high enough, any adverse shock that can increase uncertainty will set the company off into a spiral in...
5/7
which more uncertainty increases financial distress costs which, in turn, further raise the probability of default, so that, as the author points out, “the shares of companies with stronger balance sheets have this year massively outperformed those with weaker ones”.
which more uncertainty increases financial distress costs which, in turn, further raise the probability of default, so that, as the author points out, “the shares of companies with stronger balance sheets have this year massively outperformed those with weaker ones”.
6/7
High levels of debt, in other words, exacerbate volatility, both on the way up, when we probably don’t need the help, and on the way down, when we certainly don’t need it.
That is why I agree with him that it makes no sense for governments to try to force businesses to...
High levels of debt, in other words, exacerbate volatility, both on the way up, when we probably don’t need the help, and on the way down, when we certainly don’t need it.
That is why I agree with him that it makes no sense for governments to try to force businesses to...
7/7
increase their debt levels by allowing them to deduct interest and not dividends. This just undermines the robustness of the economy in order to help business owners maximize returns by minimizing debt payments – not a trade-off we a government should support.
increase their debt levels by allowing them to deduct interest and not dividends. This just undermines the robustness of the economy in order to help business owners maximize returns by minimizing debt payments – not a trade-off we a government should support.
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