So pure rearrangements of terms of sectoral balance identity [without looking at flow of funds] doesn’t prove the overstatement of profits as claimed by Auerback. Of course it still leaves the possibility of dynamics which lead to a contraction of aggregate demand and hence profits but Auerback’s claim is that this is purely due to accounting identities and this claim is erroneous.The Case For Concerted Action
Massive Overstatement Of Profits?
Ramanan
2 comments:
Have to say I agree with R on this one. It didn't seem like a correct analysis to me either.
Perhaps Marshall needs to explain what he's getting at a bit more clearly.
Asset price inflation in the form of "Mark to Market" will give rise to profits that may not be coming from the deficit, but rather from the asset bubbles. Any collapse of the asset bubble will lead to losses and restatement of earnings, or possibly losses down the line - this is what makes control fraud possible.
This may be what Auerbach was alluding to when he was talking about an overstatement of profits.
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