Showing papers on "Debt published in 1973"

The fiscal crisis of the state

Abstract: Fiscal Crisis of the State refers to the tendency of government expenditures to outpace revenues in the U.S. in the late 1960s and early 1970s, but its relevance to other countries of the period and also in today's global economy is evident. When government expenditure constitutes a larger and larger share of total economy theorists who ignore the impact of the state budget do so at their own (and capitalism's) peril. This volume examines how changes in tax rates and tax structure used to regulate private economic activity. O'Connor theorizes that particular expenditures and programs and the budget as a whole can be understood only in terms of power relationships within the private economy. O'Connor's analysis includes an anatomy of American state capitalism, political power and budgetary control in the United States, social capital expenditures, social expenses of production, financing the budget, and the scope and limits of reform. He shows that the simultaneous growth of monopoly power and the state itself generate an increasingly severe social crisis. State monopolies indirectly determine the state budget by generating needs that the state must satisfy. The state administration organizes production as a result of a series of political decisions. Over time, there is a tendency for what O'Connor calls the social expenses of production to rise, and the state is increasingly compelled to socialize these expenses. The state has three ways to finance increased budgetary outlays: create state enterprises that produce social expenditures; issue debt and borrowing against further tax revenues; raise tax rates and introduce new taxes. None of these mechanisms are satisfactory. Neither the development of state enterprise nor the growth of state debt liberates the state from fiscal concerns. Similarly, tax finance is a form of economic exploitation and thus a problem for class analysis. O'Connor contends that the fiscal crisis of the capitalist state is the inev

A state-preference model of optimal financial leverage

Abstract: IN COMPLETE and perfect capital markets, Hirshleifer [6, 7], Robichek and Myers [13], and Stiglitz [15] have shown that the firm's market value is independent of its capital structure. Although firms may issue conventional types of complex securities, such as common stocks and bonds, if the number of distinct complex securities equals the number of states of nature, individuals are able to create primitive securities. A primitive security represents a dollar claim contingent on the occurrence of a specific state of nature and can be created by purchasing and selling short given amounts of complex securities. Since in a perfect market the firm is a price taker, the market prices of these primitive securities are unaffected by the firm's financing mix. Therefore, given the firm's capital budgeting decisions which determine the firm's returns in each state, the firm's market value is independent of its capital structure. The market value of the firm equals the summation over states of the product of the dollar return contingent on a state and the market price of the primitive security representing a dollar claim contingent on the occurrence of that state. The proof of the Modigliani-Miller [8] independence thesis in a statepreference framework does not depend upon the assumption that the firm will earn its debt obligation with certainty. The firm may not earn the "promised" return on its bonds in some states of the world and would be bankrupt. In these states the firm's bonds are claims on the residual value of the firm. Although the firm's financing mix determines the states in which the firm is insolvent, the value of the firm is not affected since bankruptcy penalties would not exist in a perfect market. Therefore, sufficient conditions for the Modigliani-Miller independence thesis are complete and perfect capital markets. The taxation of corporate profits and the existence of bankruptcy penalties are market imperfections that are central to a positive theory of the effect of capital structure on valuation. A tax advantage to debt financing arises since interest charges are tax deductible. Assuming that the firm earns its debt obligation, financial leverage decreases the firm's corporate income tax liability and increases its after-tax operating earnings. However, a corporate bond is not merely a bundle of contingent claims but is a legal obligation to pay a fixed

Multimarket Expectations and the Rate of Interest

Abstract: An adequate theory of the long-term interest rate should relate the relative yields on four types of assets: money, bonds, goods, and the equity claims to the capital stock. A dynamic model, capable of empirical implementation, must also include expected future changes in the relative prices of these four assets. This paper develops such a theory of the interest rate based on multimarket expectations and shows that it is consistent with the experience of interest rates during the past two decades. In The General Theory [17] Keynes stressed the interdependence between the rate of interest and the state of expectations in the stock market. Subsequent empirical developments of the Keynesian model have, however, ignored the role of equities and focused on only two assets: bonds and money.l A particularly important aspect of our study is to reassert the joint dependence of equity and debt yields and to show the importance of expected capital gains on current bond yields. A second major purpose of this paper is to present alternatives to the traditional empirical model of expected price changes. The fixed weight autoregressive distributed lag is generalized to (1) a variable weight model, (2) a variable influence model with fixed relative weights, and (3) a model with multiple exogenous variables. Alternative methods of estimating variable weight and variable influence

Decomposition Measures for Financial Analysis

Abstract: A major characteristic of all living organisms is homeostasis-an equilibrium maintained by a selfregulatory mechanism. When such an equilibriume.g., a human body temperature of 98.6 degrees-is disturbed, forces are set in motion to restore it. It has been suggested by organization theorists [4] and economists [2], that the behavior of business organizations can also be characterized by homeostasis in which optimal (equilibrium) relationships among the various inputs and outputs are determined and efforts are made to maintain them against disturbances. Thus, for any given level of activity, for example, there exist optimal relationships between labor and capital inputs, inventory and sales, cash and shortterm securities, debt and equity capital. The analogy between living organisms and that of business organizations is, however, incomplete since the latter's equilibrium input and output relationships can change over time. Such changes generally result from (a) planned changes by management, such as the increase in the ratio of short-term securities to

Quantitative borrower characteristics associated with defaults on municipal general obligations

Abstract: THE MEASUREMENT of the quality of municipal general obligation debt has been the subject of considerable discussion in recent years. Various economic groups are interested in obtaining better measurement of the quality of such issues. Actual and potential owners of municipal general obligations are obviously interested in being able to do a better job of assessing and comparing the quality of these obligations. Agencies regulating institutional owners of municipal general obligations are interested in objectively measuring the quality of the general obligations these institutional owners hold as a basis for possible regulatory decisions. Municipalities who have issued or plan to issue such obligations are interested in receiving the highest possible quality rating in order to reduce their interest costs to the lowest possible level. Finally, persons formulating public policy are concerned that the quality of these debt obligations might affect the level and quality of municipal services and growth patterns and cyclical movements within the economy.1 The limited number of completed studies on this subject may be dichotomized into two types. First, movements in the aggregative quality of state and local debt over specified time periods have been measured by looking at aggregative economic measures.2 The second type of study has attempted to develop models using quantitative measures for a cross section of rated municipal general obligations to predict what quality rating the existing proprietary rating services would have given issues which they did not in fact rate.3 While both of these approaches contribute toward understanding the quality of municipal general obligations, neither approach seems to directly measure the quality of individual general obligation issues or to meaningfully identify the measures determining the quality of municipal general obligations. If the quality of general obligations is defined in terms of the probability of payment of all debt service charges on time, a more direct approach seems feasible. This approach would attempt to identify those quantitative borrower characteristics which determine the payment or non-payment of general obligation debt service charges through an analysis of the relationship between such characteristics and the past payment performance of municipal general obligations. Several multivariate statistical techniques are useful in examining this relationship.

Financing Agriculture: Demand for and Supply of Farm Capital and Credit

Abstract: N this paper, I discuss aggregate farm financial relationships and trends and then project a large further increase in farm debt. Along the way, I note some interesting findings bearing on the underlying causes of the debtincrease process-findings that raise questions about the completeness of the popular current assessment of that process. Where my story differs from the standard analysis, I take the liberty of stating the differences boldly--perhaps more boldly than they deserve to be advanced, given deficiencies of the data base and the fact that current econometric work on aggregate postwar farm financial behavior is still in the exploratory stage. But since my projections do not differ significantly from those emanating from the standard analysis, I thought it best to emphasize the analytical differences lest they be overlooked when, as usually happens, the numerical projections attract the limelight. To whet your appetite for the analysis, therefore, let me momentarily depart from orderly presentation of the subject to look at the main components of the standard analysis of most farm economists and lenders. A statement by Evans on the agricultural finance outlook for 1972, presented at the USDA's National Outlook Conference last February, is representative of this genre:

Dutch Investment in France, 1781-1787

Abstract: A survey of the financial history of France in the years from 1781 through 1787 reveals two interrelated developments: an unprecedented series of loans opened by the state in an effort to meet growing war and postwar expenses and to service a burdensome debt, and a speculative boom which thrived on the confusion of public and private finance which the French revenue system allowed. Both developments are of central importance in any inquiry into public finance in the decade, and thus in any explanation of the financial origins of the French Revolution. Both were fed in part by the unprecedented volume of capital and credit available on the Parisian Bourse as on other European capital markets in this decade. But to an extent too little comprehended, both the increase in public indebtedness and the speculative boom were assisted by investments from abroad, investments which helped to obscure the enormous and onerous public debt in a mask of apparent soundness by responding readily to repeated calls for credit, and which likewise helped sustain the speculative mania through the extension of credit to the speculators themselves. It is known that Genevan, Genoan, and Dutch credit played some role in these events. Indeed, Genevan commitments have, to a degree, been clarified. But the Genoan and Dutch roles have remained vague, always cited but never detailed. What will be attempted here is an analysis of the Dutch role, of the structure and method of Dutch investments in France during this period in which such investments made some contribution to maintaining the appearance of public solvency while assisting Bourse expansion.

Debt Peonage Re-examined

Abstract: In a recent Journal article Professors Ransom and Sutch (R & S) suggest “debt peonage” as a broad explanation for the course of southern economic development after the Civil War. They summarize their general thesis in the following three statements: “(1) That because of the readjustments in agriculture and the difficulties in forming new banks under the banking laws, the South was unable to re-establish a viable network of commercial banks to serve her agricultural economy.

Convertible Debt Financing

Abstract: The evolution of corporate capital structure theory in the literature of finance has been marked by the development of an increasingly imaginative rendition of market processes under conditions of uncertainty. Trade-offs between debt and equity sources of financing, and their consequent impact on shareholder wealth, have been the major concern. While the evolution is by no means complete, the notion of an efficient capital market in which investor decisions are focused on security portfolio building activities has provided significant insights into the range of opportunities open to corporate management to enhance share valuation through enlightened financing decisions. One measure of the gap between theory and application, however, can be found in the topics which thus far have not been effectively comprehended in the literature, even though the analytical technology is clearly available. Among those topics is the question of convertible debt financing as a capital structure component. The treatment of such a funds source remains essentially in the realm of folklore, the typical story being that convertibles contain the “best elements” of both equity and straight debt or that they provide a vehicle for issuing equity at a “bonus” price higher than the current price. Closer examination reveals that either view is arrant nonsense, and it is to a demonstration of this point that the present paper is addressed.

The Cost of Warrants

Abstract: It is likely that warrants will be used increasingly in the future by corporations both as means of sweetening other securities such as preferred stocks and bonds, and as securities in their own right. Many authors have analyzed the characteristics of warrants from the point of view of investors but attempts to develop a procedure for determining the cost to a corporation of issuing warrants have been lacking. We will find it convenient to measure the yield to a corporation of issuing warrants instead of common stock, rather than determining the percentage cost of warrants analogous to the cost of common stock equity, preferred stock, and interest-bearing debt.

Monetary Policy: Old Wisdom behind a New Facade'

Abstract: However imminent a change in British monetary practice may have been, few would have expected the allegedly "revolutionary" reforms recently implemented. For although some three years ago the Bank of England had expressed intentions (or some would say pursued a policy) of less concern with gilt-edged prices, actual behaviour echoed the dilemma of seeking to control some monetary aggregate (be it money or Domestic Credit Expansion) while avoiding the creation of conditions considered to be detrimental to the health of the gilt-edged market.2 Yet, contrary to what we were often led to believe, the approach to this dilemma does not rest in deciding whether or not to sacrifice the gilt-edged sacred cow of price stability on some Friedmanian altar. Indeed, some of our peers once approached a somewhat similar problem rather differently. After twenty years of almost uninterrupted fixity in Bank rate, disillusion with "the use of public finance and direct controls as the sole regulators of business activity" resulted in 1952 witnessing the initiation of a new monetary era-or so it was thought at the time. Attention therefore turned to the examination of questions of liquidity and ability to control credit. "The ability and readiness of the banks [to extend credit to the private sector] was greatly facilitated by two characteristics of the contemporary situation. The first was that as a result of the wartime cheap money policy and deficit finance the banks held [comparatively too] large a proportion of short term low yielding liquid assets (chiefly Treasury Bills) .... The second was that in order to keep down the cost of floating debt, the Bank of England stood ready through its 'special buyer' to purchase Treasury Bills at the pegged rate of 1 per cent. The banks were thus able to meet any increase in demand for advances by selling or running off Treasury Bills, without running any

The Developing Economies IDE - JETRO - Japan

Abstract: I. The Prelude The rise of the labor movement in Egypt resulted from the economic development that followed the breakdown of the monopoly system and the introduction of a market economy during the second half of the nineteenth century. There was no national substitute for the monopoly system, and the vacuum opened the way for foreign investments. Large amounts of European capital were invested in the State Debt, agrarian land companies, mortgage credits, and public utility services such as water, gas, electricity, and communications.

Short-Term Banking and Euro-Currency Credits to Developing Countries (Prêts bancaires à court terme et crédits en euro-monnaies aux pays en voie de développement) (Créditos de corto plazo bancarios y en euromonedas a los países en desarrollo)

Abstract: HE SUBJECT of short-term indebtedness of developing countries has received little attention in analysis of external debt problems, largely because of the lack of statistical information on debts with original maturity of less than 12 months. The absence of data, coupled with the widespread assumption that short-term credits are mostly trade related and continuously rolled over, has resulted in a certain neglect of the issue from the point of external debt management policies. The object of this paper is to attempt to fill, at least in part, this lacuna by reviewing the modalities and the channels through which short-term banking credits are extended to developing countries, and by raising some of the issues related to this type of financing. In the description that follows, considerable attention is given to newer credit instrumentalities developed in the Euro-currency market, because there is evidence that the evolution of facilities in this market is leading to marked changes in the modalities of financing. To the extent that developing countries increasingly utilize these facilities, the scope and aims of their external debt management policies are significantly affected. The paper alludes to the risks involved in Euro-currency bor-

The effect of fhlb bond operations on savings inflows at savings and loan associations: comment

Abstract: IN THE JUNE 1971 ISSUE, Kwon and Thornton attempt to demonstrate that Federal Home Loan Bank obligations "sold in the open market" compete with savings and loan associations for the same funds and "thus partially deprive them of their deposits," which they consider to be contradictory to the original purpose of the FHLB System.' Their findings, relating to the 1965-1969 period, rest mainly on a regression analysis of a stock adjustment model for selected financial assets using quarterly data. The model explains net new savings at FSLIC-insured S & L associations principally as a function of yield differentials between S & L deposits and other financial assets. Among the latter, FHLB securities emerge as stronger competitors for S & L deposits than do either Treasury Bills or AAA Corporate bonds. That savings flows at S & L associations as well as other deposit institutions were adversely affected by the competition of high-yield credit market instruments during some periods of the 5 years investigated, notably 1966 and 1969, is not a matter of dispute. But the specific results obtained by Kwon and Thornton, which indicate an especially close nexus between S & L deposits and FHLB obligations, warrant close re-examination. First, it should be made clear that the regression analysis merely infers yieldinduced shifts of funds from savings deposits to selected debt securities. It does not show the destination or the magnitude of funds diverted from the savings deposit market. Indeed, the authors make no such claim. It would have been helpful, however, if their cautionary statements on technical aspects of the analysis, such as simultaneous equation bias and intercorrelation of interest rates, had been matched with cautionary statements on substantive interpretation. Second, the analysis is marred by faulty specification of net new savings at S & L associations as the dependent variable. There is no reason in theory or empirical observation to assume that the behavior of S & L depositors varies significantly from that of household savers2 in mutual savings banks or commercial banks when they face alternative investment opportunities at yields substantially exceeding deposit rates. In all three types of institutions, the bulk of funds comes from relatively large accounts whose holders are presumably sensitive to the rate of return, as the authors show in their Table 1 for S & L depositors. Hence, to the extent that FHLB security issues were in competition with savings deposits, the appropriate dependent variable

Cash Flows and Financing in Texas Agriculture

Abstract: The rapid increase of real estate debt and nonreal estate debt outstanding in the farm sector at the national level is well documented [eg, 2, 4, 6] Reasons for these increases include the rapid consolidation of land ownership, continuing adoption of capital intensive technology, greater off-farm purchases of operating inputs, increases in land values, and other such factors On the one hand the ability of the farm sector to attract this debt is encouraging Yet, serious questions arise concerning agriculture's liquidity position, repayment capacity, and the actual performance of its finance market Much of the increased debt came from land sellers, other individuals, and merchants and dealers None of these are specialized lenders

Neurology's debt to Becquerel.

Abstract: Dr James W D Bull in the MacKenzie Davidson Memorial lecture (1972) gives an interesting account of the historical background on brain scanning He highlights the importance of this method in the diagnosis of brain tumours Those who are acquainted with the early development of this method would agree with Dr Bull that Dr G E Moore's contribution in this field has not received the world recognition it deserves