Re: Prospects vs Forecasts.

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

See my response below:

-----Original Message-----
From: Henry C.K. Liu [mailto:hliu@xxxxxxxxxxxxxx]
Sent: Thursday, August 22, 2002 10:53 PM
To: pkt@xxxxxxxxxxxxxxxx
Subject: Re: Prospects vs Forecasts.




Clifford Poirot wrote:

> I can
> distinguish between a sound business idea and a Ponzi scheme.

Please tell us how that is done.

Henry C.K. Liu

Sound of shuffling papers as I reach for an old working paper by Hyman
Minsky that is sitting on my desk and cite Minsky verbatim on the
distinction:

"Hedge financing units are those which can fulfill all of their current
contractual payment obligations by their cash flows: the greater the weight
of equity financing in the liability structure, the greater the likelihood
that the unit is a hedge financing unit. Speculative finance units are units
that can meet their payment committments on "income account" on their
liabilities, even as they cannot repay the principle out of income cash
flows. Such units need to "roll over" liabilities (e.g. issue new debt to
meet committments on maturing debt). Governments with floating debts,
corporations with floating issues of commercial paper, and banks are
typically hedge units.

For Ponzi units, the cash flows from operations are not sufficient to
fulfill either the repayment of principle or the interest due on outstanding
debts by their cash flows from operations. Such units can sell assets or
borrow. Borrowing to pay interest or selling assets to pay interest (and
even dividends) on common stock lowers the equity of a unit, even as it
increases the liabilities and the prior committment of future incomes. A
unit that Ponzi finances lowers the margin of safety that it offers the
holders of its debts"

Hyman P. Minsky "The Financial Instability Hypothesis" Working Paper no. 74,
Jerome Levy Institute, May 1992.

 Prepared for Handbook of Radical Political Economy, edited by Phillip
Arestis and Malcolm Sawyer, Edward Elgar: Aldershot, 1993.