Kissing Assets Goodbye

By: Michael Ashton | Thu, Nov 1, 2012
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No, thanks for asking but the power is not back on, and not likely to be coming back on for some time. But one finds a way - after all, this is the whole point of a "disaster recovery" plan. I won't be penning many articles in the next few days, but given the circumstances I thought it relevant to comment on disasters and economic growth.

After a hurricane or other natural disaster, there is always a significant confusion among economists about whether the disaster will hurt U.S. GDP, because many consumers and businesses are unable to consume for a period, or help GDP because of reconstruction expenditures.

This is a crazy debate, and it underscores a key shortcoming of economic statistics. The usual economic result is a short-term (a couple of weeks, perhaps, or a month) of softness in private expenditures, followed by an increase in GDP because of rebuilding. Disasters, measured by GDP, are usually additive: that is, growth in the quarter immediately after the event is higher than it would otherwise be, because more money is spent from savings and government expenditures rise (because of explicit relief payments but also because of increases in automatic expenditures such as unemployment claims and other such things).

But that's clearly nonsense, to the dispassionate observer. The citizen's welfare, his standard of living, is clearly lower than it was before the disaster; if it was not, we could regularly ignite the economy by destroying buildings and homes and rebuilding them.

Yet, the numbers are not wrong, per se. By definition, GDP=C + I + G + (X-M), and total expenditures clearly rise as savings (public and private) decline in the aftermath of a disaster. The problem isn't that the numbers, such as they are, are wrong but that there is a deeper philosophical problem. Most economic data measures flows, not levels (the proper term is "stocks," but I didn't want to confuse readers by sounding like I was talking about equities - I am not). There is no economic "asset" and "liability" account for the nation. If the disaster occurred to a company instead of to a nation, the company would record an expense for the impairment of an asset (a destroyed building, equipment, etc) as one transaction and then separately record the purchase of a replacement asset (if it was a durable asset, this second transaction would merely exchange one asset, cash, for a durable asset). The net result would clearly be a decline in the net value of the company. But there is no national asset or liability accounts to credit for the destruction of national assets.

And there should be. If policymakers had to focus not on increasing the expenditures of the nation, but on building its "net worth," I suspect we would see more sensible national policies.

However, that's not the way it works - but we all know that disasters hurt our economy, whatever effect they have on GDP.



Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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